It is not unusual for a buyer to request an extension of the closing date. This column will examine the reasons for extensions and what usually happens when a transaction is extended.
A buyer may request an extension of the closing date because it has not yet sold its existing home or its financing has fallen through or been delayed. Problems with financing are not uncommon and can be avoided if the buyer works with their lender or their mortgage broker to ensure that all of the lenders requirements are fulfilled well in advance of the closing date. Many lenders require sufficient time to prepare and send the mortgage instructions to the lawyer, therefore waiting until the last minute to arrange financing will only lead to problems and unnecessary additional costs. As well, buyers need to be aware that just because it has been approved for a loan, it still needs to fulfill the terms and conditions of the mortgage approval such as providing proof of income, payment of debts or many other possible conditions that the lender may require.
If the buyer requires an extension of the closing, it should be understood that the buyer does not have an automatic right to extend the closing date. The buyer will have to request an extension from the seller. In the event that the seller refuses to grant an extension, the buyer may be in default under the Agreement of Purchase and Sale and may forfeit the buyer’s deposit and may face a lawsuit for breach of contract.
In most cases, the seller will agree to an extension of the closing date, particularly if the request is to extend the closing date for a short period of time such as one or two days. Should a buyer request an extension, and the seller agrees, the seller will likely impose terms of the extension such as the buyer having to pay the following:
- The seller’s costs for the extension such as any per diem interest owing on the seller’s mortgage or bridge loan;
- A further deposit to be held by the seller’s lawyer in trust. This usually applies where the buyer is requesting an extension for a period of more than a few days. This further deposit may be forfeited if the buyer cannot close on the new extended closing date.
- The seller’s legal fees due to the extension.
- The seller’s costs for the interest owing on the funds that the seller should have received on closing.
- The seller’s costs such as additional movers fees and storage costs.
These are the typical additional costs that a buyer can expect to face when requesting an extension. Keep in mind that the bargaining power of the buyer is weak and paying these additional costs is likely preferential to losing its deposit and being sued.
Matters become more complicated if the seller is relying on the purchaser’s funds to purchase another property on the same day. This is why buying and selling on the same day imposes risks to all parties and should be avoided by obtaining a bridge loan. If the seller is able to negotiate an extension on its transaction, the buyer may be required to pay costs to both its seller and the seller’s buyer as well.
If a buyer knows that it will need an extension, it should have its lawyer make the request as early as possible. This will allow the parties to make arrangements to avoid unnecessary surprises and costs. In my experience, many extensions can be avoided if buyers understand that closing dates cannot be unilaterally extended and that there can be serious consequences when a buyer fails to close the transaction on the closing date. Planning ahead can save time, money and additional stress.