Real Estate Litigation Articles

What do you do when you are stuck with a pre-construction home or condo?

By Bob Aaron
Toronto Star contributing columnist.

Petrified buyers facing prospect of being unable to raise cash needed to close, while higher interest rates are making occupancy fees sky-rocket.

A common problem today for would-be buyers of pre-construction homes or condominiums is when the property values have dropped, interest rates have jumped to make financing impossible, and reselling at a loss in a depressed market is not realistic.

William’s predicament is not uncommon. Back in September, 2021, he signed an agreement to buy a Toronto condo for $900,000, and gave the developer two deposit cheques totalling $90,000. Another $45,000 was due on occupancy last month.

Little did he imagine that in preparation for final closing this summer, his bank would appraise the completed unit at just under $700,000, leaving him to come up with more than $200,000 he doesn’t have in order to close this summer.

Nor did he anticipate that when he took possession, the occupancy fees would escalate to a staggering $5,800 a month, largely due to the higher interest rates set by the Bank of Canada.

William’s $90,000 deposit was all the money he had in the world. The builder refused to allow him out of the deal or return any part of the deposit, but did allow a short extension of the occupancy closing to see if he could raise the $45,000 due at that time.

Based on conversations I have had with my clients and colleagues in recent weeks, William’s position with his “underwater” deal is not unusual. Many petrified buyers across the province are facing the prospect of being unable to raise the cash necessary to close when the time comes.

People like William are turning to their real estate lawyers for help. The first thing we have to advise them are the consequences of breaching the contract and failing to close. I tell them about cases like that of Treasure Hill Homes v. Yang. In 2016, Fuxiang Yang and Ziye Zhao agreed to buy a house from the builder for $2,214,813.

Six weeks before closing the buyers advised the builder that they were unable to close the transaction. The builder ultimately resold the house for $1,500,000 and sued for its losses of $616,601 and forfeiture of the deposit.

At a court hearing in October, 2021, the builder was awarded its entire damages against the purchasers.

The law is that buyers who breach a purchase contract are liable for all damages suffered by the builder on a resale, minus the original deposit which is forfeited.

Buyers faced with similar problems might consider liquidating other assets, or arranging private financing until they can close and resell.

Some builders have been able to arrange institutional or vendor-take-back financing for buyers who are at risk of defaulting.

Real estate lawyers may be able to help their clients calculate their potential losses if they raise money, close and resell, or if they breach the contract and get sued by the builder for its losses.

Sadly, where a rescue is not in the cards, some buyers may have to consider filing for bankruptcy so they can make a fresh start on life.

It’s a scary time for many buyers. They can only hope that by mid-year, the market will improve and interest rates will ease.

Pomata Investment v. Yang, 2021 ONSC 6786 (CanLII), <https://canlii.ca/t/jjn47>


Bob Aaron is a Toronto real estate lawyer. He is Certified by the Law Society of Ontario as a Specialist in Real Estate Law.

He can be reached by email at bob@aaron.ca, phone 416-364-9366. Visit his website www.aaron.ca