It is not unusual for a property to suffer damage, substantial or otherwise just prior to closing. In most situations, minor damage to a property just prior to closing would not provide the Buyer with the right to refuse to close the transaction. However, an interesting decision of the Superior Court of Justice highlights how parties should conduct themselves when there is substantial damage to a property prior to closing.
In this case, just one day prior to closing, the Buyers had a final inspection and discovered extensive water damage caused to the property, a condominium townhouse caused when the Seller was replacing the Kitec plumbing. The floors, subfloor, baseboards, ceiling and drywall suffered water damage. Upon learning of the damage, the Buyer’s lawyer contacted the Seller’s lawyer suggesting two options-1) that the Buyer’s contractor repair the damage with a holdback of $100,000 for the repairs or 2) the parties sign a mutual release with the Seller paying $25,000 to cover the Buyer’s expenses of renting another property and buying another property. In response, the Seller’s lawyer countered by proposing a three-day extension of the closing to assess the damages, stating that the repairs would be far less than $100,000. The Buyer’s lawyer suggested a holdback of $75,000 with damages of $5,000. The Seller was able to provide a report estimating that the repairs would cost $10,000. The Buyers produced a forensic engineer report stating that the Seller’s report was incomplete and did not address the possibility of further hidden damage behind the walls.
The transaction did not close and subsequently, the Seller had the damage repaired for $6,893 and resold the unit for almost $40,000 more than the original sale price. The parties went to court for a judicial determination of the dispute. In reviewing the evidence, the court referred to the standard clause in the Agreement of Purchase and Sale which provides that in the event of substantial damage, the Buyer has the option to terminate the contract or use the proceeds of insurance to pay for the repairs. The judge ruled in favour of the Buyer concluding that the damage was in fact, substantial and the Buyer’s had acted reasonably in arguing that the cost of the repairs could exceed $10,000. The judge ruled that the Buyer was entitled to receive the return of the $31,000 deposit and were also awarded damages of $33,000 for alternate accommodations, moving expenses and the cost of the engineer’s report.
The important takeaway from this case is that the judge looked at the conduct of the parties and concluded that the Seller had not acted in good faith by refusing the Buyer to have its own engineer assess the scope of the damage and limiting the damages to $10,000 when the Buyer’s engineer report stated that there could be further unknown costs. Parties to a contact have an overriding duty to act in good faith and the courts will look at the conduct of the parties when making legal determinations.
In my view, this is a correct decision as a Buyer should not be forced to accept a property which has suffered substantial damage just prior to closing. It is important to distinguish substantial damage from minor damage which would not otherwise entitle a Buyer to delay or rescind a transaction or obtain an abatement to the purchase price.