On April 6, 2018, a Superior Court held a couple, David Lea and Yixing Hu, accountable for reneging on a purchase of a multimillion-dollar home in Stouffville, Ontario. The judgment held that the couple must pay $470,000.00 for backing out of a real estate purchase where the value of the home dropped after the agreement of purchase and sale was entered into.
In April 2017, when the Greater Toronto Real Estate market was red hot and houses for sale would regularly receive multiple competing offers, the buyers, in this case, were involved in a bidding war and submitted an offer of $2.25 million for a home that was originally listed at $2 million in Stouffville, Ontario. A few months after their bid was accepted, the Toronto area market began to cool, the buyers had second thoughts as they felt they had overpaid for the home they had bid on and had trouble coming up with the down payment and pulled the deal contrary to the contract of the agreement of purchase and sale that they entered into. A few months later, the home’s price dropped to $1.8 million and the vendors sold the home to a third party for $1.77 in October 2017. As a result, the vendors of the home sued the original buyers for breach of contract.
The court described the situation as follows:
[1] When the residential real estate market is a rising market, most people – perhaps with the exception of first time buyers, are happy homeowners and investors. When the market turns and drops, it is not for the faint of heart. The facts of this case tragically demonstrate how one family, presumably desperate for their dream home, became embroiled in a bidding war and overextended their ability to finance the purchase price of that dream home.
The court ruled that the buyers were responsible for the difference in their offer and the lower price that the home sold for.
[40]
The Plaintiffs are entitled to damages based on the difference between the contracted for sale price between the parties and the ultimate sale price of $1,780,000. The Plaintiffs are also entitled to the special damages claimed.
The court went on to caution that they expect to see more cases where buyers regret their home purchases as prices in the real estate market will fall. The fall in prices is particularly due to rising interest rates and more stringent lending requirements such as the stress test – see our article on the stress test.
[41] The impact of this court’s decision will undoubtedly have a dramatic effect on the Defendants. I have every sympathy for the Defendants. With the changes in the real estate marketplace in the Greater Toronto Area, I have every expectation that there may be more cases where purchasers find that they have overextended themselves in a declining market. Purchasers would be well advised to consider making their offers to purchase contingent on financing, and for the sale of their existing home if they have one.
Overall, this judgment provides a caution to prospective homebuyers to be careful not to overbid and to ensure that they understand that they can be held accountable if they default on a home purchase when they feel they have overpaid and where the price has dropped.
References:
Gamoff v. Hu, 2018 ONSC 2172 (CanLII)
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