Deposits Part #3 – Or how the Court of Appeal clarified deposits, damages, tender, and mitigation



The decision in Azzarello v. Shawqi released on October 15, 2019 at 2019 ONCA 820, was an appeal from a decision granting the Vendors their damages AND deposit (Discussed in my earlier article: “Deposit AND Damages on the Breach of an Agreement of Purchase and Sale”).  

Deposit

So as to not keep you in suspense – the Court held that a Vendor cannot obtain an Order for damages incurred due to the breach of an Agreement of Purchase and Sale AND keep the Deposit over and above that amount.  The Vendor may sue for and obtain an order that the deposit is forfeit to the Seller if when they mitigated their damages it was less than the amount of the deposit (subject to the law of forfeiture discussed in my previous article on “Losing your Deposit”), but the deposit must be credited to any damages incurred: if the damages exceed the amount of the deposit.  The law has therefore been clarified in Ontario from its highest court.

The other very interesting take-aways from this case deals with the necessity to tender and the duty to mitigate.

Tender

Tender constitutes evidence that the tendering party is capable of, and prepared to, close a transaction and is entitled to pursue its remedy against a defaulting party.  Another way of stating this is that the party is “ready, willing, and able” to close the transaction. The tendering party is showing that they are not the cause of the delay or default in closing the transaction and shows they are acting in good faith.

In our experience as litigation counsel, we prefer to see that real estate counsel have tendered properly.  This means that if the matter goes to litigation, then there is one less argument to be made by the opposing party.   In Azzarello v. Shawqi the breaching buyers made such an argument, both at the Superior Court of Justice and at the Court of Appeal.  Counsel for the Vendors could have taken the “wind out of their sails” on this argument by tendering properly. In the end, the Court of Appeal found that the Vendors were relieved of their obligations to tender because the breaching buyer made it clear on the date of closing that he did not have the funds to close and took no steps to close.

The tender in this case was deficient because the Vendors had not provided all of the signed documents and the keys, nor had they formally tendered them.  

Mitigation

On the topic of mitigation, the Court of Appeal stated that they “reject the suggestion that the duty to mitigate obliges a vendor to accept an offer from the defaulting purchaser for less than the agreed price and then to have to sue the purchaser for the difference from the original agreed price.  While a vendor may choose to accept such an offer, for example in a declining market, the vendor cannot be obliged to do so.”

The Court further states that “It cannot be reasonable for a vendor to be obliged to reduce the loss it claims from the defaulting party by reselling the property to that party, then suing him or her for the difference. This would offer no financial advantage to the defaulting party as that party would be obliged to pay the same amount, either way. Yet the defaulting party would secure a significant tactical and procedural advantage over the innocent vendor.”

Therefore, a breaching buyer cannot point to the failure by the vendor to accept a lower price from them after breaching the Agreement of Purchase and Sale as failure to mitigate.  

Take away for real estate lawyers for Vendors

Always tender, unless you have a very good reason not to.  Remember, tendering will mean that the breaching buyer has one less argument should the matter proceed to litigation.

Take away for real estate lawyers for breaching buyers

If your Client has breached, and wishes to put in another Offer for the purchase of the same Property, make sure you send it along with a Full and Final Release for the damages the Vendor has incurred due to the breach.  The Breaching Buyer has to make it worth it to the Vendor to accept that second lower offer over. There is however, no obligation that they do so.