It is important to note that not all real estate transactions close on their targeted completion date. The recent rise in real property prices accompanied by strict lending requirements has resulted in a surge of real estate transactions dissolving or requiring an extension of the completion date. Whether you are the breaching party or the one being faced with the detriment, it is crucial to have a capable real estate lawyer to guide you through what can be a taxing process.

What Occurs When a Party Indicates That They Cannot Close on the Originally Agreed-Upon Closing Date?

When one of the parties reveals that they cannot close the transaction on the closing date stated in the agreement amongst the parties, they have committed what is known as an anticipatory breach of the Agreement of Purchase Sale. Although both parties can be subject to this breach, it is usually the purchasing party who cannot close the transaction on the originally targeted closing date, often attributable to issues related to their financing for the matter. The breaching party, once apprised of these circumstances, will customarily request an extension of the closing date through their counsel.

Thereafter, the innocent party will receive the request for an extension of the closing date, and, through their respective counsel, will proceed to note the other party in anticipatory breach of the agreement, putting forward terms which would permit the extension, provided the breaching party assumes the costs incurred and agrees to the demands imposed by the innocent party. Note that the innocent party is not obligated to accept an extension request related to the closing date – however, it is often the most viable solution for all parties, with the intent to proceed in ultimately closing the transaction.

Requests for an extension are often met with strict extension terms from the innocent party which are put forward as non-negotiable. The parties’ respective counsel will engage in negotiations, seeking favourable extension terms for their clients. The following is a non-exhaustive list of possible extension terms that a seller’s counsel may request in the event of a purchaser’s request for an extension of the closing date:

• The Purchaser is to pay for utilities and property taxes from the original closing date to the then extended closing date;
• The Purchaser is to pay the Seller’s cost of insurance for extending the transaction;
• The Purchaser is to pay an additional deposit to further secure their obligation to close the transaction on the then extended closing date;
• The Purchaser is to sign an Irrevocable Direction authorizing all deposits held in trust to be released to the Seller either immediately, or, in the event that the Purchaser fails to close on the then extended closing date;
• The Purchaser is to pay for the Seller’s per diem interest for any existing mortgages or bridge loans secured against the property in question;
• The Purchaser is to cover the Seller’s increased legal fees, if any.

Once the terms of the extension are agreed upon and executed by all parties, the transaction is permitted to close no later than the agreed-upon extended completion date. While not a common occurrence, should a further extension be requested, and the innocent party is willing to grant the same, new extension terms would then be negotiated.

What if the Seller Requires the Sale Proceeds for Their Own Purchase?

Circumstances may arise where the seller in the extended transaction is also purchasing a property by way of a separate transaction. In situations where the closing date for the seller’s own purchase is prior to the then extended closing date of their sale, they will not be able to rely on the funds from their sale to immediately fund their purchase transaction. In such a circumstance, the seller will have several options:

1. To obtain bridge loan financing to fund their purchase transaction in the interim, which would later be paid from their sale transaction funds; or
2. Request an extension for their purchase transaction.

A bridge loan occurs where a lender provides short-term financing for the purpose of a purchase transaction, with the payment obligation for the funds in question secured, albeit temporarily, against a property to be sold by the borrower (or against the property being purchased) – upon which, the funds would be issued to the lender, in addition to any applicable interest for the duration between the two closings. Note, as previously mentioned, that the lender can require the bridge loan to be secured against the property being sold, the property being purchased, or both. The bridge loan serves to rectify any funding issues that the seller may incur due to the purchaser’s anticipatory breach in requesting an extension of the original closing date. Essentially, the funds that you were expecting to use from your sale, had it closed on time, are substituted with the funds from the lender. This allows you to close your purchase on its original closing date when your sale funds are not available. Upon the closing of your sale, the bridge loan will be paid out in full using your sale proceeds.

The second option that a seller has is to ask the seller in their own purchase for an extension. It is important to note that even if this extension is due to the purchaser in your sale and not the fault of the seller, in theory – this can still be viewed as an anticipatory breach of contract, and your lawyer will need to negotiate extension terms on your purchase as a result.

Steps to Take When the Breaching Party Walks Away from The Transaction, or Does Not Meet the Extension Terms Agreed Upon:

As the seller, if the breaching party walks from the deal, or the closing day has passed without an extension, the property is often relisted and resold to mitigate damages. The seller may wish to also obtain litigation counsel to start a proceeding against the original purchaser for any loss or damages incurred. The most common source of damages that the seller would seek against the breaching party is the difference between the purchase price in the original agreement and the purchase price in the transaction that ultimately closed, should there be a shortfall or loss in resale value as a result of the original purchaser’s breach.

Forfeiture of the Deposit in the Event of a Breach:

A common question that the innocent party has upon breach of the agreement is “What happens to the deposit being held that was originally put forward by the purchaser?” Even though the innocent party bears no responsibility for the breach, they are not automatically given the deposit. The deposit can be released in two ways:

1. If the breaching party consents to the release of the deposit in writing; or
2. The innocent party applies to the court and receives a Court Order for the release of the deposit.

The deposit will continue to be held in trust by the brokerage or counsel should one of these conditions not be met.

Importance of Having a Competent Real Estate Lawyer

Competent real estate counsel is essential for a smooth and efficient closing. Whether it pertains to negotiating favourable extension terms or noting a party in breach, a party will seek to ensure that they have a diligent, efficient individual acting in their best interests under the circumstances faced.

If you are looking for a lawyer to act on your behalf in a real estate transaction or have any questions, please do not hesitate to contact the following members of our real estate team:

Jason Lane – Jason@durhamlawyer.ca, 905-668-4486 ext. 241

Jonathan Dippolito – Jonathan@durhamlawyer.ca, 905-668-4486 ext. 229

This blog was co-authored by Articling Student, Jaimin Panesar*

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”