What to do when the Seller Can’t Close

Most people assume that once an Agreement of Purchase and Sale is signed, the transaction will close on the agreed date.

Unfortunately, that is not always the case.

At Rabideau Law, we recently acted for a purchaser in a transaction where the seller was unable to close because there was not enough money available to discharge the mortgages and other encumbrances registered against the property.

In other words, the seller had a shortfall.

The situation raises an important question that many buyers never consider:

What happens when a seller signs an Agreement of Purchase and Sale, but later discovers they owe more on the property than they can repay on closing?

The Seller’s Problem Does Not Automatically Become the Purchaser’s Problem

In Ontario, a seller who enters into a valid Agreement of Purchase and Sale is contractually obligated to complete the transaction.

The fact that the seller later discovers that there is insufficient equity in the property does not generally relieve them of that obligation.

Common examples include:

• mortgages that exceed the purchase price;
• private lender charges;
• tax arrears;
• construction liens;
• judgments;
• lines of credit secured against the property; or
• unexpected payout penalties and fees.

Many sellers assume they can simply refuse to close if they do not have enough money to pay off these obligations.

That assumption is often incorrect.

Can the Purchaser Force the Sale?

Potentially, yes.

Ontario courts may grant a remedy known as specific performance, which is an order requiring the seller to complete the transaction according to the terms of the Agreement of Purchase and Sale.

Specific performance is not available in every case, but it can be an extremely powerful remedy where the circumstances justify it.

The purchaser may also have a claim for damages resulting from the seller’s failure to close.

What to do when the Seller fails to close?

In this matter, Rabideau Law acted quickly to protect our client’s position by registering a caution on title.

A caution serves as notice to the world that someone is claiming an interest in the property.

This can be particularly important where there is concern that:

• the property may be transferred;
• the property may be refinanced;
• additional encumbrances may be registered; or
• a mortgage lender may commence enforcement proceedings.

By placing other parties on notice of the purchaser’s claim, a caution can help preserve legal rights while the dispute is being addressed.

What If the Bank Takes the Property?

One of the most common questions purchasers ask is:

“If the Seller is in default on their mortgage and the bank takes over the property, can the bank simply raise the price and sell it to someone else?”

The answer is often more complicated than people expect.

Where a purchaser has a valid and specifically enforceable Agreement of Purchase and Sale, the purchaser’s claim is generally tied to the price contained in that agreement.

The purchaser is not claiming a right to buy the property at whatever the future market value happens to be.

The purchaser is claiming the right to purchase the property at the price that was negotiated and agreed upon when the contract was signed.

Whether that right can ultimately be enforced against a lender depends on numerous factors, including:

• the terms of the Agreement of Purchase and Sale;
• when the mortgage was registered;
• the nature of the lender’s enforcement proceedings;
• priority issues; and
• whether specific performance is available.

Every case is different, but a valid Agreement of Purchase and Sale can create significant rights that survive long after a failed closing date.

The Importance of Acting Quickly

When a seller fails to close, time matters.

Evidence must be preserved.

Title must be reviewed.

Priority issues must be analyzed.

Appropriate notices may need to be delivered.

Protective registrations may need to be made immediately.

Waiting too long can weaken a purchaser’s position and allow circumstances to change in ways that make enforcement more difficult.

How Rabideau Law Can Help

At Rabideau Law, we assist clients throughout Ontario with:

• purchasing real estate and protecting our client’s interest throughout the transaction;
• caution registrations;
• selling real estate including negotiating with creditors, lenders to ensure their fees are legally justified and allowing real estate to close, even when a shortfall exists;

If you have signed an Agreement of Purchase and Sale and have not yet chosen a real estate lawyer, think of Rabideau Law first.

Our team is experienced in handling complex real estate transactions, particularly in challenging and rapidly changing markets. We work proactively to protect your rights, identify potential issues before they become problems, and help ensure your transaction closes as smoothly as possible.

Not all real estate lawyers are created equal. At Rabideau Law, we believe in staying one step ahead. Whether you are buying, selling, dealing with title issues, facing a failed closing, or navigating a complicated financing situation, early legal involvement can make the difference between losing valuable rights and successfully completing your transaction.

Serving clients virtually throughout Ontario, Rabideau Law is ready to help protect your investment every step of the way.