When Does a Seller have to Mitigate in a Defaulted Real Estate Transaction?
This is an interesting question and hundreds of thousands of dollars can turn on the answer.
Recently, the Ontario Superior Court of Justice had to consider that question.
The Buyers, Hu and Lea entered into an Agreement of Purchase and Sale to buy the Gamoff’s property at 9 Wilmac Court, in Whitchurch-Stouffville. The Offer was submitted in a bidding war and was not made conditional. The market turned or had turned at this point, the Buyers immediately had second thoughts and wanted out of the deal. Unfortunately, the Sellers held them to it, but tried to sell to other buyers to mitigate their losses.
Ultimately, it sold for $470,000.00 less. The Sellers took the Buyers to Court and obtained a Judgment for the $470,000 deficiency.
It’s important to be aware of the timeline here; that’s rather critical. In order to understand the sequence of events, you will also need to know the players:
The Various Parties involved:
Sellers/ Plaintiffs: Douglas Gamoff and Sheila Gamoff
Listing Brokerage: Re/Max All-Stars Realty Inc.
Listing Sales Representative: Steve Ialongo
Real Estate Lawyer: Thomas Phelan
Litigation Lawyer: Kevin MacDonald
Buyers/Defendants: Yixing Hu and David Lea
Co-operating Brokerage: Re/Max All-Stars Realty Inc.
Buyers’ Sales Representative: George Dely
Real Estate Lawyer: Garry Shapiro
Litigation Lawyer: Patrick James
This is drawn from the Judgment of Justice Edwards on 6 April 2018.
March 29, 2017
Property listed for $2,000,000 through Re/Max All-Stars Realty Inc.
March 29, 2017 to April 2, 2017
There were 18 showings.
April 2, 2017
Three potential buyers presented offers to purchase.
April 1, 2017
The Buyers actually viewed the property with George Dely also of Re/Max All-Stars Realty Inc., who was referred to them by the listing agent, Steve Ialongo.
Buyers were interested in purchasing a property but did not wish to become part of a bidding war.
April 1, 2017
Buyers offer purchase price of $2,050,000.
April 2, 2017
Buyers advised by George Dely of multiple offers and their offer of $2,050,000 was too low.
Buyers submitted an offer for $2,250,000
Offer was accepted by the Sellers.
Terms of Agreement: initial deposit of $30,000,
second deposit of $90,000 on April 6, 2017,
closing date was August 30, 2017.
Buyers paid the initial deposit in the sum of $30,000.
April 3, 2017
Buyers requested Amendment to delay second deposit from April 6 to April 10, 2017.
April 4, 2017
Parties agreed to the amendment
Buyers contacted Ialongo and advised him that they had paid too much.
Their concern in this regard was undoubtedly fueled by the fact that they had learned that, a combination of their approved mortgage financing and assessed value of their home, would not permit them to obtain the necessary financing to close on the APS.
The APS did not have a condition that would have allowed the Defendants a means to extricate themselves from the APS.
The APS was not contingent on the Defendants obtaining the necessary financing to close the transaction.
Defendant David Lea (Lea) emailed Mr. Ialongo advising him that he had made a mistake and advised:
“I am begging please reach out to the original agent with a firm offer”.
April 6, 2017
Sellers were advised by Ialongo of the information received from the Buyers, that they had paid too much for the property.
April 10, 2017
Buyers failed to pay the second deposit.
April 11, 2017
Buyers actually attended at the property, and told the Sellers in person that they did not have the financing.
A second meeting, at which time the Buyers now allege that there was an oral agreement reached, the terms of which involved the Sellers agreeing to immediately relist the property, in exchange for the Buyers agreeing to compensate the Sellers for any difference in the purchase price.
This oral agreement is denied by the Sellers and, is not in writing as required pursuant to the Statute of Frauds.
The Sellers engaged Thomas Phelan as their real estate lawyer.
Buyers engaged Garry Shapiro as their real estate lawyer.
April 19, 2017
Phelan wrote to Shapiro and advised:
“that no oral agreement had been reached as alleged by the Buyers.”
April 19 to April 21, 2017
Email communications were exchanged by lawyers.
April 21, 2017
Shapiro had indicated to Phelan that he would be getting back to him by April 24 or 25, 2017.
April 24 to 25 April 2017
Shapiro did not communicate with Phelan.
April 28, 2017
Phelan wrote Shapiro on indicating, amongst other things:
“In view of the fact that I have not received and [sic] response to my previous correspondence I am instructed that my clients are proceeding to re list the property and hopefully re sell in a timely manner, in order to attempt to mitigate……”.
May 1, 2017
The Sellers relist at $2,250,000.
May 2, 2017
The Phelan letter of April 28, 2017 to Shapiro was responded to by
Patrick James, the Buyers litigation counsel, confirmed:
Buyers’ financing from the bank had fallen through, and as such they would be unable to close the transaction on August 30, 2017.
Mr. James went on to state in his letter:
“We are putting your clients on further notice to take immediate steps to start mitigating their losses by
(a) immediately contacting any buyers who made offers on April 1, 2017 to determine whether they may be willing to purchase the property; and
(b) re-listing the property on the market/MLS as soon as possible in order to find a suitable buyer.
We trust your clients will make best efforts to sell the property for the highest price possible in order to satisfy their duty to mitigate.”
May 1 and May 16, 2017
Sellers received no offers.
May 17, 2017
Sellers reduced price to $1,998,000 (recommended by Ialongo).
May 17, 2017 June 6, 2017
Sellers received no offers.
June 6, 2017
Sellers, offered to Buyers:
- an opportunity on a with prejudice basis to revive the APS
- by permitting Buyers to pay the supplementary deposit, and
- to complete the APS in accordance with its terms on August 30, 2017.
Offer was not accepted by Buyers.
June 6 and July 26, 2017
Sellers received no offers.
July 4, 2017
This lawsuit was commenced.
July 25, 2017
Buyers’ statement of defence was served.
July 28, 2017
List price reduced to $1,798,000 (recommended by Ialongo)
July 31, 2017
Sellers received an offer for $1,700,000.
August 9, 2017
Sellers entered new agreement with an arms-length purchaser for 1,770,000.
October 3, 2017
This transaction closed.
The Motions Court Judge stated as follows:
The fundamental issue in this case is:
when did the Defendants repudiate the agreement such that the Plaintiffs’ duty to mitigate can be said to have been triggered?
There are some possibilities, the repudiation occurred:
- April 4, 2017 ,when the Buyers communicated Ialongo their concerns, or
- April 10, 2017,when Buyers breached , by failing to pay the second deposit,or
May 2, 2017, when James wrote to Phelan on requiring mitigation.
Justice Edwards stated:
“I am more than satisfied that when it became clear that the Defendants (the Buyers) had repudiated the agreement, the Plaintiffs (the Sellers) accepted the repudiation and began their efforts to mitigate their damages.
I am equally more than satisfied that the Plaintiffs’ acted reasonably in listing the property in the manner that they did, and thereafter reducing the list prices to the point where they were able to obtain an offer that ultimately closed.
 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 Judge selected #3. The verbal discussion with the agent, Mr. Ialongo was nothing. It had no meaning. There was no consequence to it.
The Judge didn’t even consider the next intervention, that being the face to face discussion between the Buyers and the Sellers. Although the Judge accepted the fact that it did take place, he preferred the evidence of the Sellers to the effect that no agreement was reached, and even if it were, then it would have to be reduced to writing, as required by the Statute of Frauds in order to be enforceable.
The next item up, was the breach. The Buyers failed to pay the second deposit. That’s a breach of contract, for sure, but it’s not repudiation.
If a deposit is not paid and this includes a second deposit, the Seller is placed to his election:
- Ignore the breach and press on with the transaction, or
Terminate the agreement.
In this case, neither choice was selected by the Sellers. So, that still leaves the entire matter within the Buyers’ ballpark. The next move is up to the Buyers.
You will notice that almost one month went by before there was a clear notice of termination. It was a good letter by Mr. James. It was precise. It was clear. There was no mistake about its interpretation.
Up until then, it was rather uncertain as to the Buyers’ position. The Court needs certainty. What if the Buyers raised the money somewhere else, could they still close?
It’s important to note that Mr. James did not arrive until this case was a “litigation matter”. Within days, the right letter repudiating the transaction was delivered.
The particular problem was that the market was dropping like a stone at that point in time. A few days might represent several hundred thousand dollars. So, the actual precise date of repudiation is critical.
It is also noteworthy that there was one other possible date and that was when the Sellers lawyer wrote on 28 April 2017 that the Sellers would be listing in order to mitigate their losses. This letter did not state that the contract was terminated at that point. It simply referred to the steps being taken at the time by the Sellers. It left repudiation up to the Buyers.
I might point out that most of the time, property values are consistent over months at a time, so absolute precision in terms of calculating the correct date of repudiation is not really required.
This means, naturally, that there is a “Termination Protocol” which must be followed, in every case, because you never know when it will be of critical importance.
Brian Madigan LL.B., Broker