One situation can be that the value of the pre-construction house drops below the contract purchase price, and they cannot get enough mortgage financing to close on the deal. At the same time, they are unable to sell their existing house for enough money to provide the down payment on the new home.

I have several clients stuck in this situation. Some of my colleagues have clients with the same problem.

Sometimes the builder will negotiate a resolution with the buyer. This may involve a delayed closing, a price adjustment or a mutual release in exchange for giving up the deposit and making a significant cash payment to the builder.

Occasionally the parties wind up in court.

Last month, Forest Hill Homes (Cornell Rouge) Ltd. was the builder and plaintiff in a court case against the would-be purchasers, Peimian Ou and Ying Wu. In November 2016, Ou and Wu agreed with Forest Hill Homes to buy a house to be built in Markham. With extras, the purchase price was $1,729,820.99.

On the closing date, the builder was ready to close but the buyers did not have the necessary funds. The builder sued and last month brought a motion for summary judgment. A summary judgment is when a court makes a decision without a trial, based on undisputed facts.

Ou and Wu resisted the builder’s claim on four grounds:

1. the contract was incapable of completion due to a “drastic and unforeseeable drop in the real estate” market;
2. excessive delay by the builder;
3. misrepresentation by the builder’s agent; and
4. a bribe was demanded by the builder’s agent.

In his decision, Justice Ed Morgan, in Toronto, noted there was nothing in law or in the contract that made it impossible to perform the contract, as agreed. As to delay, the contract allowed the builder to extend as late as Jan. 18, 2019. The house was ready for closing on Oct. 22, 2018; there was no undue delay.

Claiming misrepresentation, the buyers alleged that the sales agent described the deal to them as “the opportunity of a lifetime.” Justice Morgan pointed out the offer’s standard “entire agreement” clause, which means that the buyers could not rely on the statement.

Finally, Ou and Wu claimed they paid the sales agent a bribe to jump the queue and sign the purchase agreement quickly.

In his decision, Morgan wrote that there is no authority for the proposition that a person who pays a bribe can have the contract rescinded.

The court ruled in favour of the builder and awarded it damages of $544,308 plus interest and $9,000 in court costs. The damages were calculated to place the builder in the same financial position that it would have been had the purchasers not breached the contract.

Buyers who sign pre-construction contracts with a long closing should be sure, considering that real estate values can both rise and fall, that they will have sufficient funds to close their deals.