Most people who buy real estate assume that only their deposit is at risk if they fail to complete the purchase.
For sure their deposit is at risk.
This has been unequivocally established by the British Columbia Court of Appeal in Tang v. Zhang 2013 BCAA 52 which states that the defaulting buyer’s deposit is forfeited whether the seller suffers a loss or not (i.e. re-sells the property to someone else at a higher price).*
In BC’s seemingly ever-increasing real estate market, the seller can usually re-sell the property to another buyer at the same or a higher price and hence, the loss of the buyer’s deposit is usually the end of the matter.
A couple who I recently acted for bought and sold at the same time and were stuck in this very dilemma namely, the buyer defaulted on their sale which caused my clients to default on their purchase. My clients’ deposit was $100K. Fortunately, we were able to negotiate a reduction of $40K in the amount of deposit that my clients forfeited (so only $60K went down the drain so to speak), as the seller was able to re-sell the property within a week for an additional $100K. My personal view was that the seller should not have kept any of the deposit as he actually benefited as a result of my clients’ (forced) default. His counsel didn’t see it that way and reminded me that Tang v Zhang would have allowed his clients to keep the whole deposit had they chosen to do so. He was right of course. Now my clients are suing their buyer to recoup their losses.
However, in a declining market, (yes, there actually is such a thing), losing one’s deposit is not always the end of the matter.
The standard BCREA/CBA contract of purchase and sale (as well as every custom pre-sale contract for new condominium purchases) requires the forfeiture of the defaulting buyer’s deposit on account of damages and without prejudice to the seller’s other legal remedies.
In other words, if the deposit doesn’t fully cover the seller’s loss, the buyer is on the legal hook for the rest of it.
It is wise to remember Sir Isaac Newton’s maxim, “what goes up must come down” (even in BC’s real estate market).
In the BC Supreme Court case of Albrechtsen v Panaich (2017 BSCC 1361) last summer the buyer walked away from the purchase of a property in Surrey, BC with a purchase price of $1,260,000 and forfeited his deposit of $60,000.
This story was well covered in the CBC news article of August 3, 2017 “Buyer who walked away…”
In the frenzied market of 2016 the buyer (foolishly, in hindsight) made the offer with no “subject conditions” and without any realtor representing him.
Unfortunately for him, the BC government had just imposed the 15% Foreign Buyer’s Tax and that negatively affected home prices shortly before the sale was to complete.
Despite numerous efforts over the next six months -even with an experienced realtor, the sellers were only to re-sell the property for $910,000, leaving them $350,000 short of what they would have received from the original buyer.
The sellers sued and the BC Supreme Court ordered the buyer to pay damages in the amount of $300,340.35 (in addition to the forfeiture of his $60,000 deposit).**
When you breach a contract you are legally responsible for ALL of the damages incurred by the other party -which this buyer found out the hard way.
So unlike the fanciful video by Craig David “Walking Away”, it’s not so easy to walk away from a real estate deal in a declining market without losing your shirt in the process!
* Tang v Zhang clarified a conflicting series of BC Supreme Court decisions which were split as to whether a seller should be able to keep the buyer’s deposit if he didn’t suffer any real loss (i.e. he re-sold the property at the same or a higher price). The Court of Appeal held that the deposit (unless unconscionably high) amounted to “earnest money” (a term commonly used in real estate transactions in the USA) and should be forfeited whether the seller was out of pocket or not.
**The buyer is attempting to set aside the sellers’ (default) judgment next month. After speaking to the seller’s legal counsel, I’d have to say that he’s definitely got an uphill battle.
Disclaimer: The foregoing is for information purposes only and not intended as legal advice to the reader. Always consult with an experienced real estate lawyer when modifying the standard real estate contract in use in BC. In addition statutory law as well as case law may change from time to time which could render this analysis inaccurate in the future.
(C) 2017 Pazder Law Corporation