Backing Out of A Real Estate Purchase


Blog by Arnold Shuchat | October 4th, 2017


Over the years, clients who are buyers have asked what they might have to do to back out of a deal that perhaps had a "subject to inspection" clause in it or based on some other technicality.  The discussion is probably not as important in a rising market as the seller could probably sell it for a higher price the following month with little in the way of tangible damages.

This all changes as soon as a market starts to approach its peak or perhaps experiences a downward correction. This was the case in the latter part of 2008 when Lehman Brothers in New York started to unravel and the underwritten mortgages which had been parcelled and sold off turned out to be worth a lot less than their face values. The entire market collapsed, and one couple who had negotiated a purchase of a beautiful single family home in Whistler for about $3.6 Million found themselves in a connundrum as the sale of another property of theirs in the US fell through just as others began unravelling.  They didn't get their money and couldn't complete on their BC purchase.  The seller considered their failure to complete a repudiation of their contract and sought to mitigate its damages by re-listing the property on the market.  It eventually sold for some $600,000 less than the original deal and the sellers turned around and sued the original buyers for that amount as damages for breach of contract.

The buyers sued to recover their deposit and the sellers counter-claimed for the loss of proceeds on the sale to the second buyer.  The buyers tried to claim that the sellers failed to rectify a hose outlet near the front of the house as requested, prior to completion as grounds for their refusal to complete. 

The Judge rejected that claim, ruling that at best it was a breach of warranty and not a fundamental breach of the contract and awarded the decline in market value to the sellers on their counterclaim.  Critical for the buyers to have been able to extricate themselves from the contract would have been the insertion of carefully worded subject conditions and wording that failure to repair certain items as required, were they properly referenced in the contract would constitute a fundamental breach of the contract.

One of my points for writing about this is that given the length of time that the property was on the market prior to the buyers' offer, it would have been quite reasonable to insert a subject to sale clause for the US property in the buyers' offer, which would have protected them against the exact scenario which caused them to suffer financial risk and subsequent loss.

The risks are real and given the volatility of the present market, Realtors and their clients need to engage in risk reduction strategies after full and frank disclosure of external issues has been had between them. Careful and proper drafting of the legal offer is key if buyers want to stay protected.

I have noticed a substantial number of price reductions in the market for new large houses. The market is definitely changing and in my experience, buyers dry up very quickly with any kind of perceived downward trend.  Caution is advised here, especially for certain niche markets.

For the complete Supreme Court case, please click here: http://canlii.ca/t/2f3rl

Greenberg & Greenberg v. Shanghai Real Estate Limited, 2010 BCSC 1837 (CanLII)