As the real estate market continues to face fluctuations and uncertainties, it becomes crucial for both buyers and sellers to understand the laws and principles surrounding collapsing deals. I will delve into the legal aspects of collapsing deals and the remedies available to innocent parties.

Understanding Collapsing Deals

A real estate transaction may collapse due to various reasons, broadly falling into three categories:

1. Default or Breach of Contract;
2. Misrepresentation or Mistake, or
3. Frustration.

Let’s explore each of these categories and the remedies available to innocent parties facing such circumstances.

Default or Breach of Contract

Default or breach of contract can arise when one of the parties fails to fulfill their obligations as stipulated in the contract. This can occur for several reasons:

• The Seller decides not to sell or cannot sell the property according to the contract terms, such as the inability to clear title due to insufficient proceeds.
• The Buyer is unable to complete the purchase, often due to financing issues or inability to make the down payment.
• The Buyer decides not to proceed with the purchase due to new information or changes in circumstances.
• Either party breaches their obligations under the contract, like a Buyer failing to pay a deposit on time or the Seller failing to deliver vacant possession as required.

The breach can be either an actual breach (already occurred) or an anticipatory breach, where one party indicates through words or conduct that they do not intend to complete the transaction as per the contract.

If the breach does not relate to a fundamental term of the contract, the innocent party is generally required to proceed with the transaction and may sue for damages resulting from the breach. However, if the breach involves a fundamental term of the contract, the innocent party may be relieved from completing the transaction while still being entitled to additional remedies, such as the deposit and damages.

Remedies for default or breach of contract may include entitlement to the deposit, damages, and, in some cases, specific performance.

Misrepresentation or Mistake

Misrepresentation can be of three types: innocent, fraudulent, and negligent. The innocent party relying on the misrepresentation may be entitled to remedies under all three types, although the specific remedy may vary.

Mistake, on the other hand, occurs when one or both parties are mistaken about a fundamental term of the contract. Relief under the doctrine of mistake usually requires a common or mutual mistake, where both parties were mistaken about a crucial aspect of the contract.

The remedy for misrepresentation can be damages and/or rescission, while the remedy for mistake is usually rescission, which involves ‘unwinding’ the contract and restoring both parties to their pre-contract positions.

Frustrated Contracts

A contract may be considered “frustrated” when unforeseen intervening events make it impossible for the parties to fulfill their contractual obligations. For the doctrine of frustration to apply, three conditions must be met:

• The parties or either of them are unable to perform the contract due to the intervening event.
• The event causing the inability was beyond the control and fault of either party.
• The contract did not make provisions to address such events or their consequences.

Remedies for Collapsing Deals

In the face of a collapsing deal, four common remedies are available to the innocent party:

1. Deposit: The innocent party is usually entitled to the deposit, but if the deposit is held under the Real Estate Services Act, its release requires consent from both parties, potentially necessitating a court order.
2. Damages: The innocent party can claim damages resulting from the other party’s breach or misrepresentation. Damages may be claimed in excess of the deposit amount if retained.
3. Rescission: Rescission involves undoing the contract, particularly applicable in cases of misrepresentation or mistake concerning fundamental terms. The innocent party may also seek damages for any losses incurred due to entering the contract.
4. Specific Performance: Specific performance is a remedy where the court orders the defaulting party to fulfill the contract as originally intended. This remedy is less common as it requires unique circumstances where damages are inadequate.

Collapsing real estate deals can be challenging and complex, demanding a comprehensive understanding of the laws and principles governing them. For both buyers and sellers facing such situations, it is crucial to seek independent legal advice to explore the remedies available and avoid inadvertently altering their legal position. If you require additional information, you can schedule a consultation with me using the form below.