Against the Current: Acting for Preconstruction Buyers in a Downward Market – Part II
Author: Bill Denstedt & Damian Rostoski, Loopstra Nixon LLP
The market for preconstruction condominiums and newly built homes remains under pressure. Rising interest rates and a volatile bond market have driven mortgage costs upwards and appraisals downward, leaving purchasers in tough waters. Purchasers of new builds are contractually bound—having paid deposits and committed to purchase prices set in a different economic climate. For some, higher interest rates prevent them from securing sufficient financing to close. Others face personal hardships or were misinformed about the transaction process. Regardless of the reason, the fallout from failing to close can be severe: deposits may be forfeited, and damages claims can exceed what buyers ever imagined. Unfortunately, many purchasers who failed to close in 2023 and 2024 are now being served with court actions naming them as Defendants and, in a lot of cases, bankruptcy is the only option.
It has been approximately a year since we last wrote on this topic. In this article, we build on our previous discussion by providing updates on two critical legal developments for preconstruction buyers: the evolving use of relief from forfeiture and the emerging "improvident sale" argument in damages claims. These updates, grounded in recent case law, may serve as precedents for arguments we may see considered in this new wave of failed-transaction actions.
Relief from Forfeiture of Deposit: Update on the Vendor Favoured Caselaw
In our previous article, we explored relief from forfeiture as a potential avenue for purchasers to recover deposits after failing to close, emphasizing its high threshold and difficulty to prove. Courts typically uphold forfeiture due to the contractual nature of deposits, but a recent Ontario Court of Appeal (ONCA) decision, Naeem v. Bowmanville Lakebreeze West Village Ltd.,[1] shows that relief is attainable in exceptional cases, particularly where the seller’s conduct is unconscionable.
Naeem was decided shortly after our previous article. It involved a purchaser and a homebuilder who entered an Agreement of Purchase and Sale (APS) and multiple closing-date extensions. The homebuilder extended the "firm" closing date from May 14, 2018, to March 2019 with inadequate notice. When the purchaser—a widow working two jobs while undergoing cancer treatment—requested a further delay to late April or early May 2019, the homebuilder insisted she close on April 23, 2019, or forfeit her rights to compensation available for delay.[2] The motion judge found that the homebuilder’s representative deliberately misled the purchaser into believing she had no choice but to accept the new date, despite the APS being voidable at that point.[3] The court found that the homebuilder was a sophisticated party who had suffered no loss from the failed transaction, while the purchaser was notably vulnerable.[4]
The ONCA upheld the motion judge’s grant of relief from forfeiture, returning the purchaser’s deposit of $82,916.19. The court clarified that a purchaser’s lack of blameworthiness for the contractual breach is not a prerequisite for relief; rather, it is one factor among many.[5] Interestingly, the court was critical of the seller’s conduct and thought that they misled a vulnerable buyer. This decision signals to vendors of new builds that their behaviour may undermine their right to retain deposits, potentially opening a door to successful relief claims.
Improvident Sale: A Developing Argument in Damages Claims
The second update addresses the "improvident sale" argument increasingly raised by purchasers to challenge damages claims after a failed transaction. When a seller resells a property at a lower price, they may sue the original purchaser for the difference. Some purchasers argue that the resale was improvident—conducted in a way that failed to maximize value—thus reducing or negating damages.
The ONCA has acknowledged this argument but has not yet defined its boundaries. In Arista Homes (Richmond Hill) Inc. v. Rahnama (2022),[6] the court held that damages are calculated as the difference between the original and resale prices if the vendor mitigates the damages by taking reasonable steps in an arm’s-length sale and the resale is not improvident.[7] However, what constitutes "improvident" remains unclear.
Lower court decisions offer limited guidance. In Switzer et al. v. Petrie et al. (2023), a property originally priced at $810,000 was resold for $600,000 two months later; the $210,000 (26%) difference was not deemed improvident.[8] Similarly, in Marshall v. Meirik (2019), a $1,850,000 property resold for $1,525,000 within two months, and the $325,000 (near 18%) difference was upheld.[9] Courts appear to defer to market conditions unless clear evidence shows the resale was well below market value.[10]
For preconstruction buyers, this underscores a triple risk: deposit forfeiture, damages claim, and potentially large awards if resale prices plummet. Sellers must reasonably mitigate damages, while purchasers alleging improvidence should bolster their argument with expert evidence specific to the market conditions in the area the property is being sold.
Conclusion
Relief from forfeiture remains a steep hill to climb, but Naeem demonstrates that the court is still open to considering surrounding circumstances and the conduct of the parties. Meanwhile, the improvident sale argument offers a potential shield against damages, though its success hinges on robust evidence, as courts hesitate to second-guess market-driven resale prices. As we noted in our previous article, the law on failed transactions historically favours forfeiture and damages. Yet, these developments highlight opportunities for purchasers to challenge that outcome and we expect to see these arguments expanded on and put to the test in the many failed-transaction actions that are currently in their early stages.
[8] 2023 ONSC 5115 at paras 1, 3, 43.
[9] 2019 ONSC 6215 at paras 7, 27.
[10] See supra note 8 at para 43 and supra note 9 at paras 27-30.