What Happens If You Can't Close

Buying a home is often described as one of the most significant financial decisions in a Canadian's life.

However, the journey from making an offer to actually closing on a property can be fraught with unexpected challenges. For some homebuyers, these challenges can lead to a situation where they're unable to close on their purchase.

If you find yourself in this position in Canada, it's crucial to understand the potential consequences and options available to you and seek legal advice as soon as possible.

Understanding the Closing Process in Canada

Before diving into what happens if you can't close, it's important to understand what closing actually entails in the Canadian context. The closing process, also known as completion in some provinces, is the final stage of a real estate transaction where the property's ownership is transferred from the seller to the buyer. This process typically involves:

1. Finalizing the mortgage with a bank or lender
2. Conducting a final walkthrough of the property
3. Reviewing and signing all necessary legal documents with a Real Estate Lawyer or notary
4. Transferring funds to the seller
5. Receiving the keys and taking possession of the property

When a buyer is unable to complete this process as agreed in the purchase contract, they are said to be in default.

Reasons Why Canadian Homebuyers Might Be Unable to Close

There are various reasons why a Canadian homebuyer might find themselves unable to close on a property:

Financing falls through

This can happen if the buyer's financial situation changes (e.g., job loss, decrease in income) or if the lender's requirements aren't met. In Canada, this could also occur due to changes in mortgage stress test requirements.

Property appraisal comes in low (or lower than expected)

If the home appraises for less than the purchase price, the lender may not approve the full loan amount. This is particularly relevant in hot Canadian markets where bidding wars can drive prices above market value.

Issues with Title

Unexpected liens or ownership disputes can delay or prevent closing. In some provinces in Canada, title insurance is less common than in some other provinces, making thorough title searches crucial.

Buyer's remorse

Sometimes, buyers simply change their minds about the purchase, especially in provinces with no cooling-off period for real estate transactions.

Conditions not met

‍ In Canada, offers are often conditional on factors like financing, home inspection, or sale of the buyer's current home. If these conditions aren't satisfied, the buyer may have the right to back out.

Consequences of Not Being Able to Close

If you find yourself unable to close on your home purchase in Canada, the consequences can be significant:

Loss of Deposit

In Canada, when you make an offer on a home, you typically provide a deposit to show the seller you're serious about the purchase. This deposit is usually held in trust by the real estate brokerage or lawyer and applied to your down payment at closing. If you can't close, you may forfeit this deposit, which can be substantial – often 5% or more of the purchase price in competitive markets.

Legal Action from the Seller

Under Canadian law, the seller may have the right to sue you for breach of contract. This could result in:

- Being forced to complete the purchase (specific performance)
- Paying damages to cover the seller's losses
- Covering the seller's legal fees

In some provinces, like Ontario, the seller has the option to accept your deposit as "liquidated damages" or to pursue you for additional damages.

Damage to Your Credit Score

If the seller pursues legal action and wins a judgment against you, it could negatively impact your credit score. This can make it harder to secure loans or credit in the future, which is particularly problematic in Canada's tight credit market.

Additional Costs

If you're unable to close, you may still be responsible for various costs incurred during the process, such as:

- Home inspection fees
- Appraisal fees
- Legal fees
- Mortgage application fees

In Canada, these fees can add up to several thousand dollars.

Emotional Stress

Beyond the financial implications, the stress of being unable to close on a home can take an emotional toll. It can be particularly difficult if you've already made plans to move or have emotionally invested in the idea of living in that specific property. This stress can be compounded by Canada's often competitive housing markets, where finding another suitable property quickly may be challenging.

Steps to Take If You're at Risk of Not Being Able to Close

If you realize you might not be able to close on your home purchase in Canada, it's crucial to act quickly and proactively:

Communicate with all parties involved

Inform your real estate agent, the seller's agent, your lawyer, and your lender as soon as possible about your situation.

Review your purchase agreement

Carefully read through your contract to understand your rights and obligations. In Canada, real estate contracts can vary by province, so local expertise is crucial. This is where seeking legal advice from an experienced Real Estate Lawyer is crucial.

Explore alternatives with your lender

If financing is the issue, discuss options like loan modifications or alternative loan products with your lender. In Canada, you might also consider alternative lenders or credit unions if major banks can't help.

Consider asking for an extension

The seller may be willing to extend the closing date, giving you more time to resolve any issues. In Canada's hot markets, this might involve offering additional compensation to the seller.

Consult with a real estate lawyer

In Canada, real estate transactions typically involve lawyers. Your lawyer can help you understand your legal options and potential liabilities under provincial laws.

Look into assigning the contract

In some Canadian provinces, you may be able to assign your purchase contract to another buyer, though this depends on the terms of your agreement and local laws. Be aware that some new construction contracts in Canada explicitly prohibit assignment.

Legal Implications of Defaulting on a Home Purchase in Canada

The legal consequences of defaulting on a home purchase can vary depending on the specifics of your contract and provincial laws. However, some common legal implications in Canada include:

Breach of contract lawsuit

The seller may sue you for breaching the purchase agreement. Canadian courts generally take a dim view of buyers who default without good reason.

Specific performance

A court could order you to complete the purchase as agreed in the contract. This is more common in Canada than in some other jurisdictions.

Liquidated damages

Your contract may specify a set amount you'll owe if you default, often the amount of the deposit. In some provinces, like British Columbia, there are statutory limits on liquidated damages in real estate contracts.

Actual damages

The seller might sue for the difference between your agreed purchase price and the amount they eventually sell the home for, plus any additional costs incurred. Canadian courts have upheld such claims in the past.

Certificate of pending litigation

Similar to a lis pendens in other jurisdictions, a seller might file a certificate of pending litigation, which is a formal notice of pending legal action tied to the property. This can make it difficult for the seller to sell to someone else until the dispute is resolved.

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The Bottom Line: The Importance of Being Prepared in Canada's Housing Market

Being unable to close on a home purchase in Canada can have serious financial and legal consequences. It's a situation that can impact your finances, credit, and ability to buy a home in the future. However, by understanding the risks, taking preventive measures, and knowing how to respond if issues arise, you can protect yourself as much as possible in Canada's unique real estate landscape.

Remember, buying a home in Canada is a complex process with many moving parts. It's always advisable to work with experienced professionals – a knowledgeable real estate agent, a reputable lender, and a real estate lawyer. These professionals can guide you through the process, help you understand your obligations under Canadian law, and provide valuable advice if challenges arise.

If you find yourself at risk of not being able to close, don't panic. Act quickly, communicate openly with all parties involved, and explore all your options. While the situation is serious, there may be solutions available that can help you avoid the worst consequences of defaulting on your home purchase in Canada.

Ultimately, the best approach is to be well-prepared before entering into a home purchase agreement in Canada. Understand your finances thoroughly, get pre-approved for a mortgage, familiarize yourself with local market conditions and legal requirements, and make sure you're truly ready for the commitment of homeownership. By doing so, you'll greatly reduce the risk of finding yourself in the difficult position of being unable to close on your dream home in the Canadian market.

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