What Happens When You Back Out of a Real Estate Deal?

Can a buyer or seller back out of a real estate deal in Canada? The answer is...complicated. 

Say a buyer purchased a home during a hot housing market. As closing day approaches, they realize they’re out of their budget. Or, the mortgage-lender completes their appraisal and refuses to back the full mortgage amount. This could put the buyer into a situation where they have to come up with money they don’t have and thus force them to walk away from the sale. 

Regardless of the reason, it’s not as easy as just walking away.

The Agreement of Purchase and Sale is a document that outlines the terms and conditions of the home purchase. Once both parties have agreed to the terms and signed the document, it is legally binding. 

Typically, buyers put a deposit down when offering on a house to demonstrate that they will honour the agreement. Backing out of a home purchase once you’ve signed the Agreement of Purchase and sale means that you will lose your deposit. 

There are a few instances where you can legally back out of a real estate deal once the Agreement of Purchase and Sale has been signed. 

You can back out of your agreement if there were conditions in the Agreement of Purchase and Sale that were not met. There could be any number of conditions in a real estate deal; the sale might be conditional on the buyer(s) selling their own home, the home meeting certain inspection criteria, securing financing, etc. When the conditions are not met, the agreement becomes null and void. 

Sometimes, a contract will become null and void for reasons outside the contract itself. For example, if it’s discovered there’s a lien on the house, if considerable damage has been done to the property before closing, or if the seller knowingly misrepresented the property in a major way. 

If none of the aforementioned situations apply to your purchase, there is little to nothing you can do to back out without consequence. In addition to losing the deposit, the buyer could also be sued by the seller for any loss in value of their property upon resale. 

For example, in 2018 a case was heard between Gamoff v. Hu. The buyers, Yixing Hu and David Lea, signed a final offer of $2,250,000 on a home belonging to Douglas and Sheila Gamoff. When Hu and Lea backed away from the deal after being unable to secure financing, the sellers had to relist the property. A 15 per cent, non-resident speculation tax was introduced and the market in their area cooled significantly. They eventually dropped the price and sold at $1,780,000. 

The Gamoffs then sued the buyers for their losses, which they argued were $470,000. The judge found in favour of the plaintiffs and awarded them $470,000 as well as the out-of-pocket expenses they incurred. Backing out of a real estate deal could mean losing your deposit and much more—sometimes rivaling the price of the property! 

It’s not just the buyer who can potentially back out of a real estate deal. Sellers may want to walk away from a deal from a multitude of reasons. Examples include the sellers not being able to find a new home to purchase in time, personal emergencies such as the death of a partner whose name was also on the house, realizing that another buyer wants to buy the property for a higher price, etc. 

As with buyers, sellers can legally walk away from a deal if the conditions stipulated in the Agreement of Purchase and Sale were not met. If there is no legal reason the seller is walking away, then the seller may be court ordered to sign the house over to the buyers in order to complete the sale.