The Ontario real estate market has seen notable shifts over the past year, with falling home prices and tightening lending standards creating significant challenges for homebuyers. One of the most pressing legal issues arising from these changes is the breach of real estate contracts, particularly where purchasers are unable or unwilling to close due to lower-than-expected appraised values.
Appraisals Falling Short: A Key Trigger for Breaches
With economic uncertainty and buyer demand cooling, property appraisals are increasingly coming in below the agreed-upon purchase price, particularly for new build transactions. For buyers relying on financing, this can be catastrophic. Lenders base mortgage amounts on the appraised value — not the sale price — and if there’s a shortfall, the buyer must cover the difference in cash.
When that gap becomes too wide, some buyers simply cannot close the deal, leading to breaches of contract. Others may choose to walk away from their deposits, weighing the loss as a better alternative to overpaying for a now-devalued asset.
Legal Consequences of Breach
In Ontario, the Agreement of Purchase and Sale (APS) is a legally binding contract. Failing to close, without a valid legal reason, is a material breach that can lead to serious consequences, including:
- Loss of deposit
- Being sued for damages, including any drop in value if the seller resells for less
- Specific performance orders, particularly for unique or irreplaceable properties
These risks underscore the importance of understanding one’s obligations before signing or walking away from a deal.
Can Market Conditions Be a Legal Excuse?
A change in market value, even a drastic one, is not a valid legal excuse for failing to close. Courts in Ontario have consistently ruled that parties are bound by the contracts they sign — regardless of whether market conditions later make the deal financially undesirable.
Only under exceptional circumstances, such as fraud, misrepresentation, or impossibility of performance, can a breach potentially be excused. Otherwise, buyers who default could face significant exposure.
What Can Buyers and Sellers Do?
Buyers should:
- Obtain a pre-approval and ensure it reflects current market appraisals
- Include conditions for financing and appraisals (and understand the implications if these are waived)
- Consult a lawyer immediately if they suspect they may be unable to close
Sellers should:
- Retain the right to pursue legal remedies, including retaining deposits or suing for damages
- Be proactive in communicating with buyers as the closing date approaches
- Seek legal advice if there is any indication of potential breach
Looking Ahead
As Ontario’s housing market continues to adjust, more real estate transactions are likely to encounter obstacles. Whether acting as a buyer or seller, early legal advice and cautious contract management are essential to protecting your rights and minimizing risk.
If you are facing or anticipating a potential breach of contract, our team at Accord Law is here to help.
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Angat Saini, J.D., LL.B.
Owner, Barrister & Solicitor
Accord Law Professional Corporation
1457 McCowan Road, Suite 209, Toronto, ON M1S 5K7
Tel: 416-288-8000
asaini@accordlaw.ca
www.accordlaw.ca