No, you can’t just walk away from your real estate contract

Trying to get out of a contract can be more difficult than you’d think.

BC’s real estate market is in a very strange and unpredictable place at the moment. New rules, regulations, transfer taxes, property taxes and rising interest rates have lead to a challenging market for buyers and sellers alike.

Whether you’re an Albertan about to be labelled a speculator or someone from out of the country now subject to a 20% extra tax on the house you’re buying, it’s probably too late to walk away from your contracts scot-free.

What happens when you want to walk away from a contract?

A contract is an agreement that is legally binding between two or more parties. If you want to walk away from a contract, there will be legal consequences for that action.

Contracts can be breached when you walk away from them, causing damages to one party that are compensable at common law.

For example, if you break a contract to buy a house for $500,000 and the seller has to sell it for $450,000 you could be on the hook for the $50,000 difference, as well as any other costs the seller may endure because of the breach (additional realtor costs or mortgage payments, for example).

It’s not just the direct costs to the other party that you might be responsible for – it could also be indirect or consequential costs which you end up paying.

Did the seller need that money to buy another house, and did that other deal fail when you walked away? You may wind up responsible for the seller’s consequential contract breach too.

Frustrated Contracts

Walking away from a contract is different from being unable to complete on the terms of a contract.

A contract is said to be “frustrated” if an event makes the contract impossible to complete.  A frustrated contract is unenforceable.

The case of Folia v Trelinski lays out the issue very well:

The event in question must have occurred after the formation of the contract and cannot be self-induced. The contract must, as a result, be totally different from what the parties intended… The change must totally affect the nature, meaning,purpose, effect and consequences of the contract…

Folia v. Trelinski

You can’t simply claim frustration if you want to walk away from a contract – frustration is a high standard to meet.

New rules and taxes

Some parties try to claim frustration (rather than breach) when governments create new unexpected rules and taxes.  These claims may or may not succeed, depending upon the facts.

In KBK No 138 Ventures Ltd v Canada Safeway Limited, the BC Court of Appeal examined a purchase of land where the city council had changed the maximum allowable square footage for a building after the contract had already been signed.

In that case, the change in square footage made the intended business suddenly impossible to build, and the courts found this did indeed frustrate the contract.

Courts seem to be less sympathetic when it comes to issues around taxes.

Canada v Fairmont Hotels Inc. is a case out of the Supreme Court of Canada on contract rectification for tax purposes (two parties tried to apply to the court to change the contract to make it more tax friendly) which ended a common practice of “fixing” contracts for tax advantages. 

Wilkie v Jeong, a recent case about the Foreign Buyer’s Tax from North Vancouver, found that the imposition of a 15% tax on foreign buyers (which she found to be unexpected, and also found the defendant could not afford) did not frustrate a contract.

Furthermore, the defendant purchaser Jeong had to forfeit her deposit, in addition to any damages the plaintiff may have suffered resulting from the breach that were not assessed as of the trial.

Given these recent cases, it’s unlikely that any change in taxation, small or drastic, can lead to a reasonable excuse to back out of the contract.

Not sure? Ask.

We recommend you always try and complete your contractual obligations – it’s very easy to rack up unexpected costs and damages that you’ll be responsible for if you do breach a contract.

If you have any questions about a real estate contract, including what your responsibilities are, it’s best to seek legal advice as soon as possible.

The sooner you get information, the more time you have to act on it. Both lawyers and BC Notaries can advise on real estate conveyances, so give us a call if you have any questions.

			November 4, 2018 11:39 am 
Published by
Tags: , , ,