Ep5. Pre-con, losing $750,000 in this hot market.

A Chinese couple signed a contract to buy a house in Vaughan, Ontario, but failed to fulfill the contract, so now they lost the initial deposit of $150,000.  On top of that they have to pay an additional $600,000. 

 

This ruling came out in October 2021, about two month ago. What happened? This case involves the GTA real estate market from 2016 to 2018. As you might know it was the seller’s market until April 2017. The market cooled down after the Ontario government implemented the Non-Resident Speculation Tax (NRST) In the spring of 2017.

 

I think there is a lot to learn from this court case at this time when the real estate market is very hot, so I will introduce this case today.

 

You can view this case from the Internet. I will put the name of this case and the case number in the description. The document is a bit long, but if you want to read the entire case for yourself, please do so.

 

This document provides the real names of the plaintiffs and the defendants, as well as the name of the real estate agent and the builder involved in the case. However, when I explain, I will use nicknames instead of the real names of the people involved.

 

To help you understand, I’ve drawn simple drawings of the characters.

 

Today’s story goes back to 2016. The 2016-2017 GTA real estate market was similar to the current real estate market, which is still a seller’s market.

 

If you look at this period in the graph you will see house prices were going up and up until early 2017. Then the market cooled down rapidly when the 15% Non-Resident Speculation Tax was announced.

 

Today’s protagonists are Chinese couples whose last names start with Y and Z. It is not known from the judgment whether they were a married couple or just 50/50 joint investors. For convenience, I’ll just call them the couple. 

 

When the price of the resale homes goes up, the price of pre-construction homes goes up as well in general. Sometimes, the pre-construction homes go up even more dramatically because builders set the pricing decision based on the current market condition and project it in 2-3 years into the future.

 

The couple signed the Agreement of Purchase and Sale for a pre-construction home from a builder for about $2.2M in September 2016, when the market is just getting hotter and hotter and put a deposit of $150,000.

 

After some time, the couple added a few upgrades to the pre-construction home. This increased the contract purchase price by about $15,000. 

 

The builder did their work and completed the project, including the upgrades later added. They had kept their side of the bargain as promised and notified the couple that the closing would be a certain date in 2018.

 

But six weeks before the closing, the couple told the builder, ‘We can’t fulfill this contract’. So the builder sold the house to a third party for $1.5 million.

 

And the builder told the couple, ‘Since you guys didn’t keep your promise, we’ll take the deposit you already paid, and you have to pay us an additional $616,000.’ 

 

In case you are wondering., this $616,000 is calculated as follows, I think: $2.2M original price minus $1.5M from the third buyer minus the $150,000 deposit, plus lawyer’s fees.

 

Nobody would give up this big sum of money without a fight, right? So, through a lawyer, the couple made the following claims.

 

On the day they signed the contract, the couple met with their realtor Z and the builder’s sales agent at the builder’s office. The couple claims that they made sure of the 4 points with the realtor and the sales agent.

 

By the way, the couple can’t speak English, and the builder’s sales agent cannot speak Chinese. In other words, it is assumed that the realtor Z acted as an interpreter.

 

The couple claimed that the following four points were made to the other two people and the realtor and the sales agent understood.

 

First) We do not have the ability to close the $2.2M house. Is it ok?

Second) We don’t have the ability to borrow enough money to close with a mortgage. Is it ok?

Third) We have been reassured by Realtor Z and the builder that the Property will be assigned prior to closing, with profits to us, on top of deposits paid by us.

Fourth) Pre-approval of the mortgage is not necessary because the house will be assigned to another buyer before closing. right?

Neither the realtor nor the builder’s agent answered the above questions, instead, silence prevailed, which was understood by the couple as acceptance.”

 

The problem, however, is that all of this was done verbally. There is absolutely no evidence. As a result, when I read the case, it seems that the court is doubting the couple’s claim.

 

Another problem for the couple is if the builder did their best to get the best price when the builder sold it to a third party, The couple argued that if the builder sold it to a third party for $2M instead of $1.5M, the amount that they have to pay for damages would be smaller, but the builder didn’t put in any effort, the couple claims.

 

In response, the builder submitted a comparison report of 9 similar houses that were sold near the house in the same period. It is confirmed that the average selling price of the 9 houses is slightly less than $1.5M. The court considers the report reasonable and does not accept the argument of the couple.

 

My guess is that the couple knew that they could not resell or assign at a good price because the real estate market had already cooled down. Regardless they had an ability to close, they didn’t want to close and hoped that they could just walk away with losing only the initial deposit of $150,000.

 

In conclusion, the builder completed the project including the upgrades. They kept their promises as stated in the contract. However, the buyers, the couple broke the promise of the contract. Regardless of changes in the real estate market, they have to face the consequence of not keeping a contract, a promise that is legally binding. 

 

For your reference, the couple is currently in a lawsuit with Realtor Z. It is currently under litigation, so the details are unknown, but I suspect that the main argument would be that Realtor Z did not sufficiently explain the dangers of buying the pre-construction condominium.

 

From this case that has actually happened, we can learn a lot regarding the hot real estate market. These are the three most important things I think:

 

1) A promise is a promise. A contract is an important mutual agreement that has legal ramifications.

2) The real estate market may turn rapidly in a short period of time.

3) Be sure to document in a verifiable manner.

 

Please keep these in mind when making real estate transactions in the future. Thank you.

 

Pomata Investment v. Yang, 2021 ONSC 6786 (CanLII)

 

https://www.canlii.org/en/on/onsc/doc/2021/2021onsc6786/2021onsc6786.html