The spring and summer of 2017 saw one of the hottest real estate housing markets in the Greater Toronto Area. According to the Toronto Real Estate Board, the average year-over-year sale price increased by six per cent. Buyers and sellers scrambled to take advantage of the hot market with housing prices soaring to record highs amidst bidding wars and no-condition offers.
When housing prices took a sudden, yet anticipated, decline in the fall, many buyers walked away from their Agreements of Purchase and Sale with impunity. This resulted in a spike in real estate litigation; however, many more buyers and sellers opted to re-negotiate the terms of their original agreement. In cases where the failure to close the transaction was due to the buyer being unable to secure financing because their bank/financial institution refused to fund, this proved a lot trickier for those transactions.
In most residential real estate transactions, a buyer seeks financing to cover the balance of the purchase price once the deposit and closing costs have been factored in. In many instances, buyers finance up to 95 per cent of the purchase price through an insured-back mortgage. A prudent buyer works with a mortgage broker or directly with a financial institution to obtain a mortgage commitment before he/she “goes shopping” and once that commitment is in hand, that buyer feels great comfort in his ability to determine his “buying power”.
The buyer then locates a suitable property, makes an offer that is accepted and thereafter takes the firm Agreement of Purchase and Sale to his bank/financial institution. The institution then performs its due diligence on the property and the buyer with the end goal of funding the balance of the purchase price through a mortgage, on closing.
But what happens when the buyer is willing, but not able, to close on the deal because the bank won’t ante up the mortgage funds? What recourse does a buyer have against the bank/financial institution for failing to advance mortgage funds on closing, thereby causing the buyer to breach the terms of an Agreement of Purchase and Sale?
Generally speaking, a loan commitment can give rise to binding legal obligations between a buyer and the bank/financial institution, in which a failure to perform those obligations can give rise to an action, by the buyer, for breach of contract. In Kerr v. Miller, the plaintiff was a lawyer who agreed to fund $60,000 to the defendant to cover certain liens, arrears and expenses related to the defendant’s property in Kentucky and to keep the latter from falling into power of sale with his bank. The $60,000 loan commitment was reduced to writing in the form of a promissory note and second mortgage on the property. The defendant only requested, and the plaintiff only advanced, $31,000 of the loan. The defendant later ran into more financial problems, which placed the property in jeopardy and the plaintiff, concerned that he may not recover on his second mortgage, commenced a suit to recover the full amount of the loan.
The court, in deciding whether there was a legal obligation for the plaintiff to advance more than the $31,000 he had advanced, found that a loan commitment can give rise to binding legal obligations and the failure to perform that obligation can give rise to an action for breach of contract. However, the court noted that there must be a clear legal obligation to make the loan advance. In which case, the failure to advance the loan gives rise to a claim for damages caused by the breach.
In a typical real estate transaction, a mortgage commitment usually provides that the bank/financial institution is only obligated to advance mortgage funds once a number of preconditions have been satisfied on the part of the buyer. If the buyer fails to satisfy these preconditions, the bank/financial institution is not required to deliver any funds on closing. Conversely, if the buyer satisfies all the conditions of the commitment, the bank/financial institution’s failure to advance funds in accordance with the agreement is a breach of the contract and the buyer is entitled to a claim for damages.
In Bank of America Canada v. Mutual Trust Co., a developer had taken out a construction loan with Bank of America. Later, another financier, Mutual Trust Company pledged a long-term mortgage to the developer and signed an assignment of takeout financing with Bank of America, permitting the latter to be repaid its construction loan from the funds advanced by Mutual Trust. In the early 1990s, the real estate market collapsed and Mutual Trust took the position that it was not legally obligated to advance any further funds to the developer or Bank of America unless the developer met additional conditions.
Both the trial judge and the Ontario Court of Appeal found Mutual Trust liable for the Bank of America’s damages when it, without justification, refused to advance mortgage funds.
Be careful to review the terms of your mortgage commitment in detail prior to firming up an Agreement of Purchase and Sale; otherwise, you may be on the hook to deliver the closing funds even if you are unable to obtain financing from your bank. If you or your client finds themselves in such a situation, consider obtaining an extension from the seller to allow you to assign the transaction to another buyer who is ready, willing and able to close.