SELLER’S BREACH OF THE PURCHASE AND SALE AGREEMENT: CAN THE INNOCENT BUYER FORCE THE SALE?

By Matt Mulholland

When a seller is unable or unwilling to close on the sale of a home, the buyer may need to respond quickly. If you are a realtor, recommend the buyer obtain legal assistance without delay, especially if it is unlikely the buyer will be able to purchase a comparable home. 

This is because the buyer may not only have a claim for damages, but, occasionally, they might also have a claim for specific performance (namely the court might make an order requiring the seller to honour the Agreement of Purchase and Sale).

Such relief is unique to each situation when a seller fails to close. 

When the buyer fails to close, claims by the seller are primarily for damages or forfeiture of the deposit. The seller needs to take steps to mitigate their damages, but, otherwise, the claim for damages can be commenced within two years of the date of the breach. 

However, if the buyer wants to force the sale of the home, rather than seek damages, then the buyer must move quickly as the seller may enter into a new agreement with a third party. The first thing a buyer needs to do is obtain leave to register a Certificate of Pending Litigation ("CPL").  

The CPL is a court order that operates as a place holder helping to prevent the property from being sold to a third party while the case winds its way through the court system.  Failing to obtain a CPL means that the seller is free to do with their house as they wish, and the property would likely be sold well before the case is decided at a hearing. 

If the buyer’s goal is to enforce the Agreement of Purchase and Sale, speed is of the essence.

That said, just because the seller breached the Agreement of Purchase and Sale and the buyer wants to compel the sale, it does not mean that a court is going to grant this relief. 

As surmised by Justice Nicholson in Berthault et al. v. Green Urban et al. 2021 ONSC 8039 ("Berthault"), the primary reason CPLs are rarely granted is because the party seeking this relief, must show that the losses incurred by the failed closing cannot be compensated for in damages. If it is found that the losses can be compensated for in damages, then the court is likely to deny leave to register a CPL and the buyer will be left with a claim for damages. 

The concern that adjudicators have in ordering a CPL is that they deprive a party of their rights based on allegations, albeit ones that meet the onus of showing that there is a triable issue, without first hearing the entire matter and having an opportunity to assess credibility. 

Judges therefore apply an expansive analysis when deciding whether to grant a CPL. Judges attempt to balance both the risk of harm to the innocent buyer in not granting the CPL and the risk of harm to the seller who breached the agreement if the CPL is granted.

If the court grants a CPL, the CPL stops the seller form realizing profits from a further sale, forces the seller to continue to shoulder any financial burden of continued ownership and the market value of the home could decrease over the time that the CPL remains in place.

Without a CPL, the buyer is at risk of being priced out of the market or losing the perfect house that they thought they had purchased but for the seller’s breach. The fear of being priced out of the market is a much more realistic concern over the last few years given the meteoric upward climb of house prices. 

The CPL provides the buyer with a great deal of leverage in trying to force the seller to close, which it would not otherwise have had. 

The court is forced to weigh these conflicting harms to both the buyer and the seller which is not a simple task. This is why, when the court finds that the party who wants the CPL could, instead, be compensated in damages, it is unlikely that a CPL will be granted. 

Accordingly, the courts have developed the following test, which was summarized by Justice Nicholson and was previously set out in Perruzza v. Spatone, 2010 ONSC 841. 

The test, in summary, is as follows: 

(i) the threshold in respect of the "interest in land" issue in a motion respecting a CPL is whether there is a triable issue as to such interest, not whether the plaintiff will likely succeed; 

(ii) the onus on the party opposing the CPL is to demonstrate that there is no triable issue in respect to whether the party seeking the CPL has "a reasonable claim to the interest in the land claimed"

(iii)Factors that the court can consider on a motion to grant leave for a CPL or to discharge a CPL include: 

(i) whether the plaintiff is a shell corporation, 

(ii) whether the land is unique, 

(iii) the intent of the parties in acquiring the land, 

(iv) whether there is an alternative claim for damages, 

(v) the ease or difficult in calculating damages, 

(vi) the presence or absence of a willing purchaser, and 

(viii) the harm to each party if the CPL is or is not removed with or without security; 

(iv) the governing test is that the court must exercise its discretion in equity and look at all relevant matters between the parties in determining whether a CPL should be granted or vacated. 

In Berthault, the buyer was one of several buyers of pre-construction homes from Green Urban People Ltd ("Green Urban"). Prior to closing and allegedly relying on a term from the Agreement of Purchase and Sale, Green Urban advised the buyers that the agreements were terminated but allowed the buyers to repurchase the properties for a larger amount of money. 

The Agreement of Purchase and Sale contained a clause requiring the matter to be dealt with by way of an arbitration; however, for various reasons, which are now subject of an appeal, Justice Nicholson found that he had jurisdiction to determine whether this was a proper case to grant leave to register a CPL. This order would effectively stop Green Urban from selling the home before the validity of its actions were determined in the eventual arbitration.  

As set out above, there are various parts of the test that a buyer must overcome to be granted leave to register a CPL. This post focuses on whether damages would be an alternative remedy to ordering the sale of the property to the buyer because, as pointed out by Justice Nicholson, it is usually "the biggest hurdle for the Applicants to obtaining a CPL”. 

The reason that this is so difficult is that real estate is assigned a market value. The characteristics of a property alone are seldom sufficient to render a property unique. That was the case in Berthault because Justice Nicholson found that none of the properties at issue were truly unique because there were comparable units in the vicinity. 

The question he asks though, which leads to what makes this property at issue unique, is whether a substitute would be readily available. 

With this in mind he reflects that much like in Lucas v. 1858793 Ontario Inc. o/a Howard Park et al, 2020 ONSC 964 ("Lucas"), real estate prices have been increasing dramatically. In Lucas, Justice Schabas reasoned that "because the Agreement contained "advantageous terms" and could not have been readily duplicated in a competitive, volatile real estate market such as Toronto", this was enough for a finding of uniqueness. Therefore, damages would not be an alternative remedy to the specific performance sought by the buyer. 

Lucas was appealed and Justice Brown of the Court of Appeal provided some further guidance in Lucas v. 1858793 Ontario Inc. o/a Howard Park et al, 2021 ONCA 52, as to how courts should determine uniqueness. While upholding Justice Schabas’ decision, Justice Brown said that a court should examine the subjective uniqueness of the property from the point of view of the buyer at the time of contracting. The court must also determine objectively whether the buyer has demonstrated that the property or the transaction has characteristics that make an award of damages inadequate for the particular buyer. 

Another factor that Justice Nicholson considered is the location of the property, as was done by Justice Sharp in Traopiano v. Stonevalley Estates Inc. 1997 Canlii 12176 (ON SC). 

In that case, Justice Sharp granted specific performance because the buyer attached significance to the location of the residential property because it was important to the buyer that he was near a ravine and the property was unique in that respect.  

In the case at hand, Justice Nicholson found that the property was also unique to Berthault because of its unique location as midpoint between the buyers’ workplaces. 

Accordingly, because of the fluctuating price of the property and the location of the property, Justice Nicholson found the property was sufficiently unique to satisfy that part of the test to grant leave to register a CPL on the property.

The seller will therefore be unable to sell the property until such time as the adjudicator determine whether it was proper for the seller to terminate the sale. 

There were other factors that Justice Nicholson relied on in finding that this was a proper case to grant a CPL, including the conduct of the parties, but it does show that a change in price and the location of the property are relevant factors to consider before deciding whether the buyer can seek a certificate of pending litigation in furtherance of forcing the seller to sell the property on the agreed upon terms or whether damages are appropriate. 

It is important to remember when a seller fails to close it is important that the seller consult with a lawyer as soon as possible to ensure that they can explore all options available to them at that time or they will likely be left with only a claim for damages.  

As an aside, Green Urban was granted leave to appeal to the Divisional Court, Green Urban People Ltd. v. Berthault, 2022 ONSC 737. The appeal will relate solely to whether the Superior Court had jurisdiction to make this order considering the arbitration clause.