What Happens If Financing Falls Through Because Coronavirus Causes a Market Crash?
Frustratingly, Without Prior Cases the Law Will Be Unclear For Many Circumstances. The Coronavirus Crisis Raises Unprecedented Legal Issues. Buyers, Sellers, Realtors, Among Others, Should Obtain Professional Legal Advice and Carefully Review the Available, Although Limited, Information.
Similar Questions About Covid19 Affected Realty Deals Include:
- Does Coronavirus Trigger Frustration of Contract For Realty Deals?
- What Happens If Moving Services Are Unavailable and a Seller Is Unable to Vacate?
- What Happens If Financing Falls Because Corona Causes a Market Crash?
- Can a Buyer Now Demand Sanitizing When the Deal Required Broom Swept Only?
- Is It a Breach of Contract If a Seller Denies An Inspection Because of Corona?
A Helpful Guide On How to Prepare For the Various Legal Issues Affecting Realty Deals As Arising From Covid-19
Springtime is usually the busiest period for real estate dealings; and in particular, the showings and the negotiations for the sale of residential dwellings. However, whereas certain mandates requiring isolation and social-distancing, as well as common sense, may interfere or disrupt showings, inspections, and may even impair the capacity for move-out on or before closing day, some deals may become problematic. Additionally, the Covid19 Crisis is expected to dramatically affect the realty market including home values resulting in a rise of abandoned deals. Expected legal concerns include:
- Whether a realtor should perform showings despite social-distancing concerns;
- Whether a real estate deal is frustrated by outside forces that disrupt the closing date;
- Whether a buyer can abandon a deal if a seller is unable to close due to market changes.
- Whether a buyer can now require sterilization rather than just broom swept cleanliness; and
- Whether a seller can disallow an inspection due to social-distancing concerns;
These are just some of the legal issues that sellers, buyers, and realtors, may soon be facing.
Market Value Change
Glut Brings Prices Down
As many reports within the media suggest, and many realty experts predict, a downward market is likely to result due to affects of the Covid19 Crisis upon the realty market. Sadly, with the loss of many jobs and economic recovery expected to take some time when the crisis is over, a glut of properties are expected to hit the marketplace; and according to the principles of supply and demand, pricing in such a scenario predictably drops. Aggravating this situation is the calling of mortgages as market values fall and lenders impose requirements upon borrowers to make up the difference between property value and mortgage balance requirements. As many people will be economically struggling, making up this difference will be problematic; and accordingly, more property gets placed upon the market and the problem further perpetuates.
A common difficulty in a falling market arises for those who signed deals prior to the decline and are yet to close. These situations are even more troublesome for those who signed unconditional deals or deals without financing as a condition. In these circumstances, it is possible that the value of the property declines significantly between the date that the deal, and thus price, was negotiated and the date that the deal is intended to close. Where value changes significantly from the date of the deal to the date of the close, and whereas lenders will require a certain 'loan to value' ratio, buyers will be required to make up the difference in cash which becomes a very difficult problem for most people.
Another problematic concern involves the volume of people suddenly unemployed due to the Covid19 Crisis. Whereas some of these people will be in the midst of a realty transaction, having signed a deal and now awaiting the closing date the loss of employment likely means the loss of financing whereas many, perhaps most, lenders will require continued employment as a requirement of the financing. As above, many buyers may suddenly be in the predicament of having signed deals that are unable to close due to the lack of, or loss of, access to financing.
Closing Failure, abandoned realty transactions
Where the turn in the market results in a buyer losing access to financing, or other affects of the unexpected Covid19 Crisis market decline, as above, many buyers may be put into the position of inability to close or otherwise complete the transaction. In some circumstances, buyers may feel a sense of blessing for an inability to complete what may now be a poor financial deal due a market value drop after signing; however, in usual situations buyers that fail to close a realty deal are held liable for the losses incurred by the seller including the price difference between the signed deal and a subsequent 'lower price' deal with a substitute buyer.
In the recent past, following the short-lived but sudden realty market downturn of 2017, buyers who failed to close, due to lack of financing, choice, or other reason, attempted to argue that the market value decline was an unexpected and unforeseen force majeure that frustrated the agreement and thereby the buyer should be excused from failing to close. Specifically, it was argued that the market change resulted in something different than what was bargained for, meaning that the buyer bought a property of significant value but was receiving a property of lesser value. This type of argument was struck down by the courts by applying the reasoning that realty purchases are inherently speculative in that values can go up and values can go down and that changes in value arising from general market forces are foreseeable rather than an unforeseeable force majeure. Specifically, it was stated in Forest Hill Homes v. Ou, 2019 ONSC 4332 that a frustration would require an unforeseeable event that would render the contractual obligations impossible to fulfill, being something more than a market change, whereas it was said:
 Defendants’ counsel submits that the Defendants’ performance of their obligations under the APS was made impossible by a drastic and unforeseeable drop in the real estate market which made it impossible for them to obtain the financing they needed. I note that the onus is on the party claiming frustration of a contract: Bang v Sebastian, 2018 ONSC 6226 (CanLII), at paras 27, 30. Despite this, the Defendants have not obtained any appraisal of the Property, nor have they submitted any other real estate market evidence. They simply say they could not get financing, and they subjectively attribute this to a change in the market.
 Even if there were evidence to support the Defendants’ assertion, there is nothing about a change in the market that amounts to an unforeseen event that substantially changes the agreement. This was confirmed in Paradise Homes North West Inc. v. Sidhu, 2019 ONSC 1600 (CanLII), at para 11, where the court reasoned that a change in the market is not the kind of radical change that transforms the nature of the contract:
In this case, the defendant defaulted because he was not able to borrow the amount of money he required to close the deal…. While he states that he was unable to borrow the money because the market prices fell and that this was unforeseen and such a radical change that it completely changed the nature of the APS. I do not find that to be the case. The contract was not rendered totally different from what the parties had intended. The parties had intended that 10 Truro Circle would be sold by the plaintiff to the defendant for the agreed-upon amount of $819,990. The contract did not change and was not altered.
 There is nothing in the record to support the Defendants’ assertion that something has occurred that frustrated the contract and made it impossible to perform as agreed.
With this said, it appears clear that, per previous decisions of the courts, something in the nature of a force majeure beyond common market forces must be the cause of change in market values. Whereas the Covid19 Crisis is unprecedented, whether the pandemic is deemed enough to constitute the "something has occurred that frustrated the contract and made it impossible to perform as agreed" as contemplated at paragraph 7 of the Forest Hill Homes case remains unknown; and accordingly, only when a fresh round of these cases are addressed by the courts, with the pandemic argued as the cause, will a answer to this legal question become known.
Denial of Inspection by Seller
Most often an Agreement of Purchase and Sale starts off as a conditional offer, with various terms and conditions to protect the various parties to the transaction. These conditions will have a deadline by which they must be completed, after which the deal is said to be ‘firm’ and all parties are expected to fulfil their obligations to each other. One of the most common conditions involves a home inspection which will typically state, “This Agreement of Purchase and Sale is conditional upon the Buyer obtaining a report, satisfactory to the Buyer in the Buyer’s sole discretion. “ Included in the condition is usually a provision that will state that the seller agrees to provide reasonable access to the property for the purpose of allowing the Buyer, or the Buyer’s home inspector, to conduct such an inspection. Finally, the clause will end with a provision stating that the condition is included for the benefit of the Buyer and may be waived at the Buyer’s sole option.
So, if a Seller agrees to such a condition, then subsequently refuses to allow the Buyer, or the Buyer’s home inspector, to conduct such an inspection, within the window of time provided in the condition, the Buyer would be in a position to choose whether or not waive the condition.
If the Buyer chooses to waive then the sale may proceed, but of the Buyer refuses to waive the condition, then the Buyer has a reason to walk away from the sale without penalty and any deposits paid by the Buyer will be returned.
Amending Cleanliness Condition
When a property is sold, such as a residential dwelling, the Agreement of Purchase and Sale typically requires that the seller will leave the home in 'broom swept condition' when vacating on, or before, the closing date. While this is a typical term, and although many previously signed realty deals likely contain this condition, in the face of the Covid19 pandemic, some buyers may now be concerned for coronavirus contamination and may now seek to impose, after the deal was done, additional conditions requiring sterilization, among other things.
Generally, as basic principles of contract law, a party to a contract is unable to unilaterally impose changed terms of the contract upon the another party. This principle applies to contracts for the purchase of realty and appears as settled law per the case of Rexhill Holdings Ltd. v. Maybird Investments Ltd. et al., 1972 CanLII 465 (ON SC) as confirming the earlier case of Stubbs v. Downey and Downey, 1957 CanLII 392 (ON CA),  O.W.N. 330, 8 D.L.R. (2d) 720.
In Stubbs the buyer agreed to purchase a house where the seller was, “to arrange a mortgage of $6,800 repayable $57.11 monthly at 6% per annum”. Rather than making the arrangements as per the Agreement of Purchase and Sale contract, the seller instead arranged a mortgage that would have the buyer obliged to, “pay $75 quarterly with interest at the rate of 6% per annum on the unpaid principal under a mortgage”. Although there was a negligible difference between what was stated in the Agreement of Purchase and Sale when compared to what the seller actually arranged, the Court of Appeal determined that a party is unable to make or impose a unilateral change to a contract even if the change is negligible. The Court of Appeal stated the reasoning that “[I]n essence, the purchaser, had he completed the transaction, would not have received what he had bargained for”.
Accordingly, in the event that a buyer would want to change an previously executed Agreement of Purchase and Sale, being a contract already entered into, so to alter the usual stipulation that upon closing the seller will vacate the premises in a broom swept condition, the buyer would need the consent of the seller to make that change. Furthermore, as an exchange for an altered condition, some form of compensation such as additional funds paid would be required as the law, generally, expects that a bargain is a bargain and to legally amend a bargain requires that there be a two-way benefit known as 'bilateral consideration'.
With all of the above said, whereas it is suggested that a buyer is unable to impose a change within a 'done deal', it may still be helpful for a seller to accommodate a request a higher level of cleaning upon closing a realty deal. This is especially so if the buyer makes such a request because the seller has undergone self-isolation within the premises due to a coronavirus infection. In such a circumstance, the seller may be wise to provide cleaning to the point of 'sterilization' or otherwise act in such a way as to eliminate, or at least minimize, the possibility that the property could be contaminated on the closing date. While it may be very difficult for a buyer to prove, if proof is possible at all, should a buyer subsequently sue after closing with the allegation that the property was contaminated by some form of lingering coronavirus, in what is known as a latent defect claim, even if the seller were successful in defending such a lawsuit, the time, energy, and cost, may be much more troublesome than the cost of a very thorough cleaning.
Available Services Difficulty
As a result of mandated social distancing measures and various services being deemed non-essential, a seller may become unable to vacate a property promptly. For example, previously hired movers may be unable or unwilling, due to coronavirus fears, to provide moving services on a closing date. While such a circumstance may appear as, and may potentially be a breach of the Agreement of Purchase and Sale, both a seller and a buyer are obligated to mitigate any potential damages from such a breach as well as required to act reasonably in an effort to complete the contract. The duty to act reasonably and in good faith is indicated within the summary headnote of Garrett v. Ayr Ventures Inc., 1995 CanLII 7140 which reads:
There is an overriding duty to act reasonably to attempt to complete the contract, and because of its lack of good faith, the plaintiff could not rely strictly on the provisions of the agreement ...
Futhermore, most agreements for the purchase of residential property in Ontario include a term that speaks to ‘time being of the essence’ and that such time “may be extended or abridged by an agreement in writing”. This term simply means that should there be a time limit to do something, such as vacate a property by a certain date and time, it should be done by the stated time; but, if such becomes impossible, then the buyer and seller may be able to change the time.
Although such was other than a realty deal case, the Supreme Court decision in Bhasin v. Hrynew,  3 SCR 494 confirms the duty of parties to act in good faith in performing the obligations within a contract; and accordingly, unless some genuinely serious difficulty would arise from agreeing to extend or abridge a closing date should the coronavirus impair a seller from vacating and thereby closing as scheduled, such as if movers became unavailable, it would seem that the buyer would be unable to use such failure to vacate as a reason to walk away from the transaction. Accordingly, a buyer, who may become concerned with sudden plummeting market values, among other things, may be unable to use a 'failure to vacate' as an opportunity to avoid completion of a realty deal.
If the Covid19 pandemic is deemed as a force majeure, meaning an unforeseeable circumstance outside the control of the parties to a contract, such as an Agreement of Purchase and Sale between a seller and a buyer, the enforcement of signed realty deals awaiting closure, among other deals, may become troubled and litigated. Without precedent law, whereas the Covid19 Crisis is an unprecedent situation, it is very dfficult to strongly predict how the courts will decide the litigation expected to arise from the many, and varied, legal issues stemming from the Covid19 Crisis.