Lawyer’s Corner: Backing Out of Construction Contracts

Signing ContractLou Pesta, Q.C., writes:  A number of large condominium projects are nearing completion in Calgary and elsewhere in the province. With the current economic downturn, both REALTORS®  and buyers are asking about the consequences of not completing a new condominium purchase. Since this is a complicated area of law and several remedies including specific performance, forfeiture of deposits and damages may be available to the developer, you are strongly urged to refer these types of questions to a solicitor.

For the purposes of dispelling some common misconceptions only, this article is going to address some of the consequences of a buyer reneging on a binding contract of this type. First of all, it should be noted that condominium construction/purchase agreements are typically tailor-made by the developer’s solicitors to represent the best interests of the developer. As such, they rarely allow the buyer not to complete the purchase even if, in the buyer’s opinion, there have been excessive delays in the construction of the project or if the buyer believes there have been some other breaches of the developer’s obligations.

If the buyer unilaterally elects not to complete the transaction, then some of the agreements will allow the developer to “accelerate” the payment of the balance of the purchase price and/or keep any and all funds paid by the buyer to the date of default. Moreover, the developer is rarely limited by the agreement to accepting the forfeited deposits as a genuine pre-estimate of the damages. Usually a cause of action for additional losses (damages) is available against the buyer. These losses can be quite substantial in a buyer’s market, such as we are experiencing presently, where prices are declining. It may take the developer some time to resell the property to another buyer for a reasonable price.

The recoverable damages could include any or all of the following:

  • loss of resale value (provided that the builder acts reasonably to “mitigate” the loss)
  • extra advertising expenses
  • legal costs incurred by the developer arising from the default
  • extra real estate commissions paid
  • all carrying costs for the time period from the original closing date to the ultimate re-sale date

In conclusion, a buyer should never be advised that they can walk away from a construction agreement and simply lose the deposits paid on the transaction to date. In most instances, where possible, it will be better for the buyer to complete the purchase and either rent or re-sell the property themselves in order to minimize the financial losses suffered.

If it is not possible for the buyer to complete the purchase due to circumstances beyond the buyer’s control, such as the revocation of the mortgage commitment due to declining market values or loss of the buyer’s employment, then the buyer should attempt to negotiate a settlement with the builder. Although not obligated to do so, the builder might reduce the purchase price to allow the transaction to close or agree to fixed compensation for the loss of the sale.

 

Lubos K. Pesta, Q.C.
Walsh Wilkins Creighton LLP
Phone: 403.267.8432 Fax: 403.264.9400
lpesta@wwclawyers.com

Next on Lawyer’s Corner:  What You Need to Know About Cash Back Deals

 

Copyright Alberta Real Estate Association. Reprinted with permission. AREA makes no guarantee as to the accuracy or completeness of this information. The comments expressed in these articles are for information purposes only and serve to highlight general principles. Each situation s different and you should seek legal counsel before pursuing any particular course of action.

4 responses to “Lawyer’s Corner: Backing Out of Construction Contracts

  1. Walking from a builder contract in a falling market or coming depression is not a bad idea if you leave less on the table then you take with you.

    For walking away from the unit you purchased:

    -The condo building may never be fulling finished and you will be left with concrete and rebar. It’s happend in California and Flordia

    -Condo fee increases to those who don’t walk based on units NOT sold to cover. Condo fees in building in USA skyrocket due to small tenent base.

    – Condo building near empty and vagrants move in.

    – Builder disapears and buyer gets nothing, leaves hole in the ground.

    – Falling prices could mean less workmanship, poor quality and unskilled labor used to cut costs.

    – Builder may “sell the project” down the line to another cheaper builder or worse.

    – Year delays, damage, vandalism, crime, grow-ops units, gangs, homeless, etc can move into the unit next door to you.

    See the US condo market in Florida, California, Texas and many other states where all these have happend.

    Then the big issue… Rent, to who and at what massive loss when you could have the above issues?

    Things to think about before you DON’T take the opportunity to walk away…

    Mike

  2. Nice info , can’t wait to read about the cash back segment! Very interesting about condos!

  3. Leah Van Loon

    More good reasons not to buy a condo…

  4. Pingback: Lawyer’s Corner: Condition of Property at Possession | Calgary Real Estate Review

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