Many buyers assume the worst-case scenario when a real estate deal falls apart is losing their deposit. Painful? Absolutely. But manageable.

That assumption can be dangerously incomplete.

Walking away from a real estate deal in Ontario can potentially expose a buyer to losses far beyond the deposit, particularly when a property has to be resold for substantially less than the original purchase price. One Ontario court case involving a Mississauga property shows just how serious those consequences can become.

Walking Away From a Real Estate Deal in Ontario Can Cost More Than Your Deposit

There is a common belief among buyers: put down a deposit, fail to close, lose the deposit and move on.

That isn't necessarily where the financial consequences end.

If the seller suffers damages greater than the deposit, a buyer's potential liability may extend beyond the money already put down. This can become particularly significant when real estate prices are falling and the seller eventually resells the property for less.

In other words, the deposit can potentially be the floor, not the ceiling.

What the Menon vs. Simpson Case Shows Buyers

An Ontario court case discussed in the video involved a buyer who agreed to purchase a Mississauga property for $8,385,000.

When the closing date arrived, the buyer couldn't close and asked for more time. The seller agreed to an extension with additional terms, including more deposit money and daily payments. Another extension followed, but the buyer still couldn't complete the transaction.

The seller eventually put the property back on the market. It sold for $6,550,000.

That's a difference of $1,835,000 between the original contract price and the eventual resale price, and the court ordered the buyer to pay that loss.

But the financial consequences didn't stop there. The case also involved $550,000 in agreed carrying costs, along with interest and legal costs ordered by the court. Altogether, the financial hit went well beyond $2 million.

All for a property the buyer never lived in, never enjoyed and never actually owned.

What about the seller's responsibility to reduce the loss?

The buyer argued that the seller hadn't done enough to mitigate the damages. In particular, he argued that the seller should have accepted an earlier $7 million offer and questioned whether sufficient steps had been taken to get the property sold.

Mitigation can be important when a buyer breaches an agreement because a seller generally has to take reasonable steps to reduce the losses caused by that breach. In this case, however, the buyer did not bring the evidence needed to succeed with that argument.

How a $40,000 Deposit Can Become a Six-Figure Problem

An $8 million property may feel far removed from the average home purchase, but the underlying issue can apply to a much more typical transaction.

Consider the example discussed in the video: a couple agrees to purchase a detached home for $1.2 million and puts down a $40,000 deposit. At the time, everything appears to be fine. They're pre-approved, they have the income and they expect the financing to be straightforward.

Then they discover their financing depends on selling their existing home, which is having difficulty selling.

Closing approaches, and they can't complete the purchase.

They lose the $40,000 deposit. Then the seller puts the property back on the market in softer conditions and eventually sells it for $1,050,000.

The difference between the original $1.2 million contract and the $1.05 million resale is $150,000. With the $40,000 deposit credited toward those damages, another $110,000 remains.

Suddenly, what looked like a $40,000 problem has become a six-figure one.

That's why changing market conditions matter. In a rising market, a failed closing can still have serious legal consequences, but a seller may have an easier time reselling at the same price or potentially even higher. When prices are declining, the difference between the original contract price and the eventual resale price can become much larger.

A Pre-Approval Doesn't Eliminate Every Financing Risk

Another potential problem buyers need to consider is the lender's appraisal.

A buyer might be perfectly capable of making the expected monthly mortgage payments and still run into trouble at closing because the lender isn't only assessing the borrower. It's also assessing the property.

Suppose you've agreed to pay $1.2 million, but the lender's appraisal supports a value of only $1.1 million. The lender doesn't necessarily advance money based simply on the price you agreed to pay. It determines how much it's prepared to lend based on its own criteria and valuation.

That gap can leave the buyer needing substantially more cash to complete the transaction.

And sometimes buyers don't discover how serious that shortfall is until they're already committed to the purchase.

Winning the Offer Isn't the Finish Line

For years, buyers became accustomed to highly competitive situations where properties attracted numerous offers. Conditions were waived, inspections were waived and buyers sometimes did almost anything they could to get the house.

But there's an important question to ask before removing protections: what happens if you win the house and then can't close?

Winning the offer isn't the finish line. Closing is.

A financing condition can be a form of risk management. Depending on how it's drafted and properly exercised, it may provide a lawful way out if financing cannot be obtained.

Conditions shouldn't automatically be viewed as something that makes an offer weak. Buyers need to understand the market they're actually purchasing in and consider the risks before waiving protections simply to make an offer appear more competitive.

Sellers Can't Casually Walk Away Either

This issue isn't limited to buyers.

Once an offer has been accepted, sellers can't simply change their minds because circumstances change or they later wish they'd negotiated a different deal.

In one situation described in the video, a seller's husband tragically died in a car accident about a week before closing. The wife tried to terminate the contract, but the transaction could not simply be cancelled.

In another situation, a seller saw a neighbour's property sell two months later for $100,000 more and questioned why they should still sell their own home to the original buyer at the agreed price.

The answer comes back to the same point: an accepted agreement of purchase and sale is a binding contract. A seller who fails to complete a transaction may also face a claim from the buyer.

How Buyers Can Better Protect Their Real Estate Deal

Before signing an agreement, buyers should understand their financing beyond simply knowing that they received a pre-approval several weeks earlier.

• Ask what happens if the lender's appraisal comes in below the purchase price.
• Understand how much additional cash you could access if there's a financing shortfall.
• Consider whether anything has changed with your income, debt or credit.
• Confirm whether your financing is appropriate for the specific property you're purchasing.
• Use conditions strategically rather than automatically waiving them to make an offer more competitive.

If you believe you may have a closing problem, don't hide it and hope the issue disappears. Contact your real estate lawyer, lender or mortgage professional, and real estate agent immediately.

Depending on the situation, there may be possibilities such as a negotiated extension, price adjustment, alternative financing or potentially a vendor take-back mortgage. Every situation is different, and none of these options is guaranteed.

Once you've actually defaulted, however, your negotiating position can become much worse.

What should sellers do after a collapsed deal?

If you're the seller on the other side of a failed closing, documentation can become extremely important. Keep records of listings, price reductions, showings and serious attempts to get the property sold.

If the dispute ultimately reaches court, the steps taken to mitigate the loss may become a significant issue.

Know What You're Signing Before You Commit

A changing market can change the financial consequences of a failed real estate transaction.

Don't sign an agreement of purchase and sale assuming your deposit automatically represents the maximum amount you could lose if you can't close. It may not.

And don't assume that having a pre-approval means your financing is guaranteed.

If you're already approaching a closing and are concerned that you may not be able to complete the transaction, this isn't the time to rely on general information online. Speak with an Ontario real estate lawyer and the professionals involved in your transaction as soon as possible.