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Jane Chen
Sales Representative

RE/MAX Realtron Realty Inc.
Independently owned and operated

Phone: 905-470-9800  Fax: 905-470-7770  Mobile: 416-418-9568

What Happens When You Fail to Close?

November 13, 2012 - Updated: November 13, 2012

By Lorne Shuman


Sometimes people change their minds and buyers of real estate are no different. Unfortunately, many buyers are totally unaware of the serious consequences of failing to close after a binding Agreement of Purchase and Sale has been signed. Buyers may face severe penalties for failing to complete a real estate transaction whether it is due to an inability to obtain financing or because they simply want to get out of a perceived bad deal. This column will examine what may happen when a buyer defaults and fails to close. 


First of all, when you agree to purchase real estate, you sign a legally binding contract. That contract sets out various rights and obligations for each of the parties involved. Failure to comply with these rights and obligations may result in serious consequences. Each party to the transaction is expected to comply with the terms of the contract in good faith. If there is any dispute regarding the real estate transaction, the contract is the first thing lawyers and judges will look at to determine who is right and who is wrong.


People change their minds about purchasing real estate for many reasons.  Some of these reasons are unforeseen and may arise following execution of the Agreement of Purchase and Sale. One common reason is the inability to obtain the necessary financing to fund the transaction. This can be avoided by making your offer to purchase conditional upon successful financing.


Buyers also sometimes experience a change of heart when a home inspector reveals that the home being purchased requires major repairs. This type of surprise can also be avoided by making an offer conditional upon a satisfactory home inspection. In both cases, an appropriate escape clause provides buyers with a justifiable way out of the deal without any penalty.


Sometimes people change their minds after realizing they have made a bad deal or they cannot close due to the problems on a sale transaction where the funds from the sale are needed for the purchase.  This is more problematic. It is not reasonable to walk away from a deal and expect to have your deposit returned without any consequences. In fact, you may end up losing more than just your deposit.  Buyers who know that they cannot close must speak to their lawyer to obtain proper legal advice. A lawyer can explain all the options that are available. Remember that the seller is expecting you to close the transaction. Matters become even more complicated if the seller is relying on your funds to purchase another home.


If possible, your lawyer may be able to obtain an extension of the closing with the lawyer for the seller. This will involve extra time and expense. If the buyer changes its mind well before closing, the seller may choose to let the buyer out of the deal. For this to happen, both parties must sign what is called a mutual release. Usually, however, sellers will be reluctant to do this, unless they are confident that they will be able to resell the property for at least the same price as was agreed upon in the first sale. The cost to try to break a transaction is a bitter pill to swallow, but the alternatives may be worse. The penalty will likely be the loss of the deposit at the very least.


In the event that a resolution cannot be reached and the deal does not close, the seller  may commence a lawsuit against the buyer.  In order to do so, the seller will have to immediately relist the property in order to mitigate its damages.  The lawsuit will typically seek to have the buyer’s deposit forfeited as well as seek monetary damages.  The amount of the damages could be substantial particularly where the seller sold the property for a lower price than in the original Agreement of Purchase and Sale.  The seller will need to prove all of its damages in court.


As you can see, there are serious consequences to a buyer who fails to close a transaction with a seller.  In cases like these, the parties should always consult with an experienced real estate lawyer to obtain proper advice.





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