What obligations do sellers and buyers have in a real estate transaction when the property has been accidentally damaged?

What if the property was damaged by a fire or flood for example, prior to closing?

The Superior Court of Justice addressed this complicated issue in a Court Case.

In a case heard by the Court the Seller accepted an offer from a Buyer and they had a firm deal.

Between the date that Agreement was accepted, and the closing date of the sale, there was a fire.

The Seller hired a restoration contractor to repair the property prior to the closing date.

The Buyer continually asked for documentation on the damage and proof of repairs.

The Buyer also asked to inspect the property however the Seller and his Realtor were not cooperative and stalled in providing the reports.

Allegedly the Seller and his Realtor repeatedly ignored or deflected the buyer’s requests.

The Seller only allowed the buyer to inspect the property after the repairs were completed.

The Buyer decided NOT to close the transaction because of inadequate disclosure on the extent of the damages.

The judge ruled that the Seller breached the agreement by not fulfilling his insurance obligation (Clause 14 of the Agreement of Purchase and Sale) to provide meaningful inspection of any damage occurring on the property, in order for the buyer to determine how to proceed with the closing.

The Buyer was entitled to receive back his $80,000 deposit for the property.

Here is what the Judge found in this case that led to the final ruling:  

With regards to “Substantial Damage”:
The Buyer’s expert noted there had been a large discrepancy between the quotes provided by the restoration contractor and Service Master, who was the alternative restoration contractor that had provided a considerably steeper quote.

The Buyer’s expert testified that the amount proposed by Service Master was an indication that the house likely required significant repair that was not entirely identified by the restoration contractor.

Although the cost of repairs was small in comparison to the purchase price, this factor did not determine whether damage on the property was substantial or not

Fire may cause considerable inconspicuous damage and must also be assessed on quality, character and consequences.

All of the evidence supported that the fire damage was substantial, which triggered the obligations under Clause 14 of the Agreement.

Regarding the “Insurance Clause”:
Based on Clause 14 of the Agreement of Purchase and Sale:
Given that the buyer was only allowed to inspect the house after the repairs had been completed, he was denied his contractual right to determine if there was substantial damage, and whether he’d like to terminate the contract, or take a reduction in price reflecting the cost of repairs.

The buyer was therefore entitled to refuse to close the purchase and to have relief from forfeiture of their deposit.

Regarding Good Faith:
In the performance of one’s contractual duties, there is an implied duty to take all reasonable steps to fulfill one’s obligations in good faith.

The Seller demonstrated bad faith in the performance of his contractual duties by continually undermining the buyer’s legitimate contractual interests and rights under Clause 14 of the Agreement.

So, What Does This Mean For Sellers?
Agreements containing an insurance, or a similar clause, entitles buyers to inspect damage that has occurred on the property prior to closing, so that they may determine how they would like to proceed with the transaction.

In performing this obligation and other contractual duties, sellers are expected to act in good faith by not undermining the buyer’s contractual interests and in the case of property damage, being transparent with the damage and any repair work that is undertaken.

In addition, where a transaction does not close and the seller makes claims for damages arising from the buyer’s violation of the purchase agreement, sellers have a duty to take reasonable steps to minimize their losses. Where they do not take such reasonable steps, they may be unsuccessful in claiming damages from the buyer.

If you are thinking of buying a home or selling a home anywhere in the Greater Toronto Area and want to talk more about how to do it safely and smoothly … I’m always happy to chat.  Just get in touch with me by email or phone.