Navigating Real Estate Transactions in Alberta: Can You Back Out of a Real Estate Deal?

Introduction

The world of real estate is a dynamic and often complex topic, where the dreams of homeownership or property investment meet the realities of contracts, negotiations, and legal obligations. In Alberta, like in many other provinces in Canada, the question often arises: Can you back out of a real estate transaction before closing once you have made an offer or signed on the dotted line?

Understanding Real Estate Contracts in Alberta

An Agreement of Purchase and Sale is a binding contract that grants permission for the buyer and seller to advance with the property transaction. This document outlines the specific terms and conditions governing your home purchase, and it’s essential to understand that backing out of this commitment carries significant legal consequences.

In Alberta, the ability to back out of a real estate transaction hinges on various factors, primarily the terms and conditions specified in the Agreement of Purchase and Sale and the circumstances surrounding the deal.

Once the Agreement of Purchase and Sale is signed by both the buyer and the seller, it immediately gains legal force. Typically, as a demonstration of their commitment to honoring the agreement and finalizing the transaction, the buyer provides a deposit, usually ranging from one to three percent of the purchase price. If the buyer decides to withdraw from the deal after the contract is executed and the deposit is submitted, they forfeit the deposited funds, which will not be refunded.

Can you legally back out of a real estate deal?

Before delving into the specific scenarios in which individuals can withdraw from a real estate agreement, it is crucial to understand that while real estate transactions are typically binding, there are certain circumstances where one can legally back out of the deal without incurring significant penalties. Let us explore some of these situations below for each party.

Buyer’s Perspective: Withdrawing from an Accepted Offer

1. Purchase Contract Conditions: The Agreement for Purchase and Sale is the foundation of any real estate transaction. It defines the rights and responsibilities of both the buyer and the seller. The Alberta Court of Appeal has defined a condition as “a term so important that failure to perform it entitles the other party to treat the contract as at an end.”[1] The terms can vary, but common conditions often include home inspections, title search, securing financing, meeting zoning requirements and the sale of your current property. Conditions clauses play a crucial role by protecting the buyer against unexpected situations and ensuring that the property aligns with the buyer’s expectations.

Without these protective measures, buyers could potentially find themselves in situations where they must purchase a property that falls short of their expectations or one they cannot secure financing for. Failing to meet any of these conditions may grant you the right to cancel the deal without consequences.

2. Cooling-Off Period: In Alberta, the legal framework offers a distinctive advantage to prospective condominium buyers from builders. This advantage comes in the form of a “cooling-off” period, as outlined in section 13 of the Condominium Property Act. This provision offers buyers a unique ten-day window of opportunity, which they can use to their advantage. This grants buyers the right to rescind or cancel the contract they entered into with the builder, and this can be done without incurring any financial penalties. During this brief yet significant period, buyers have the chance to step back, review their decision, and carefully reconsider the terms and implications of their purchase.
3. Breach of Contract by the Seller: A seller’s breach of a purchase contract occurs when the seller fails to fulfill their required obligations as outlined in the agreement. One common example of such a breach is the seller’s failure to carry out necessary repairs or maintenance on the property as agreed upon. In this case, the seller neglects their responsibility to ensure the property is in the specified condition at the time of transfer.

Another typical example of a seller’s breach involves the deliberate withholding of crucial information regarding the property, including any latent defects. These defects, often concealed or not readily visible during a standard inspection, include issues such as structural weaknesses, electrical malfunctions, plumbing complications, or other hidden problems. Latent defects can prove to be a significant cause for concern for property buyers, as they may lead to unanticipated and costly repairs or renovations post-purchase.

A seller’s breach not only undermines the trust and integrity of the transaction but also risks the buyer’s investment and overall satisfaction. When a seller is found in breach of their obligations, it enables the buyer to take corrective action, typically entitling them to terminate the contract.

4. Mutual Agreement: In some cases, both parties may agree to cancel the transaction and back out of the contract before closing. To ensure the transparency and clarity of this mutual decision, it is important to formally document the agreement. The documentation should specify the terms and conditions of the cancellation, including any financial aspects like the deposit or other expenses incurred throughout the transaction. Consulting with legal professionals or experienced real estate agents can help ensure that the cancellation process is executed correctly.

Seller’s Dilemma: Can a Seller Back Out of a Contract Before Closing in Alberta?

• Unmet Buyer Conditions: Similar to the conditions discussed above for the buyer, these also may work in favour of grating the seller the right to back out of the real estate deal. If the buyer fails to fulfill certain conditions outlined in the purchase agreement, the seller may have the right to terminate the contract. Common conditions might include the buyer’s inability to secure financing or failure to obtain a satisfactory inspection or appraisal report within the specified timeline.
• Breach of Contract by the Buyer: If the buyer breaches the terms of the contract, such as missing deadlines or failing to make earnest money deposits, the seller may have the right to back out of the real estate deal.
• Misrepresentation by the Buyer: If the buyer provides false information or makes deceptive statements about their financial capabilities or intentions to complete the purchase, this could potentially give the seller grounds to terminate the contract and back out of the real estate deal. However, proving misrepresentation can be challenging and requires the satisfaction of various elements.
• Mutual Agreement: As mentioned above, if both the buyer and seller mutually agree to back out of the real estate deal, the contract can be terminated.

If a party chooses to back out of the real estate deal, this choice must be promptly conveyed to the other party, ideally without delay and certainly, before any actions are taken that would imply continued commitment to the contract. Failure on the part of the electing party to promptly communicate their intention to exercise their right to revoke the contract upon becoming aware of circumstances permitting such action, together with the party’s continuation of actions indicating commitment to the contract, will lead to the forfeiture of the right to back out of the deal.

The Consequences of Backing Out of a Real Estate Deal before Closing

Once the buyer and seller have reached an agreement and signed the Agreement of Purchase and Sale, and all conditions have been met, a strict commitment to the contract is expected. The room for cancellation is generally limited.

Buyers, even if they believe they overpaid or face unforeseen financial shifts, may find that these reasons do not justify the potential consequences of backing out of a real estate deal.

For a buyer who opts to walk away, there are several potential consequences. The forfeiture of the deposit is a distinct possibility, and the seller may even file a lawsuit to recover losses incurred due to the property’s reduced resale value. To illustrate, consider a scenario where the initial agreement set the house’s purchase price at $1,000,000. On the closing day, the buyers withdraw from the deal, and the property is placed back on the market. A subsequent offer comes in at $800,000. In this situation, the buyers who backed out may be responsible for compensating the seller for the loss in value, which amounts to $200,000.

These scenarios are not uncommon. In the case of Heritage Station Inc. v Sharifzadeh, the buyers forfeited their deposit and were further compelled by the Alberta Queen’s Bench (now Alberta King’s Bench) to pay $67,798.47 representing the loss on resale for the diminished property value following the buyer’s backing out of the deal.

The financial repercussions do not end there. Buyers who back out of the deal may also be held liable for the seller’s legal fees, ongoing mortgage-related expenses, and any other financial losses sustained by the seller.

Preventive Measures and Alternatives

In the realm of real estate, prudence is essential, especially when considering backing out of a real estate deal prior to the closing phase. To navigate this process with greater confidence and fewer potential consequences, consider the following strategies:

• Strategic Purchase: Make your purchase decisions thoughtfully, particularly in a competitive market with an extended closing period. In cases where market conditions are heated, leading to declining property values, it is possible that the property may no longer appraise at the agreed-upon value. This can result in a financial gap that the buyer must bridge. A well-informed purchase, based on the state of the market and your long-term goals, can help mitigate this risk.
• Prioritize Selling First: When you prioritize selling your current property before the purchase of a new one, you gain a clearer understanding of your financial capacity for your next home. This approach enables you to establish a well-defined budget, reducing uncertainty in your real estate transactions. However, the situation becomes more intricate when the decision is to buy first, making careful consideration essential.
• Legal and Financial Consultation: Engaging with a legal professional is a prudent step when navigating real estate deals. An experienced lawyer can guide you through the complexities of real estate deals and help you add the appropriate conditions to your Agreement of Purchase and Sale before finalizing the deal. Additionally, consulting a financial advisor can offer insights into your financial standing and affordability, ensuring that your decisions align with your long-term goals.

As Canadian housing prices experience a decline from the record highs observed during the pandemic, it is not uncommon for real estate transactions to face uncertainties and potential complications. While legitimate reasons for backing out of a real estate deal do exist, the decision to do so should not be taken lightly, as it can have substantial financial implications for both buyers and sellers. Therefore, whether you are contemplating a home purchase or sale, it is advisable to seek professional guidance to make informed decisions in this dynamic real estate market.

Seeking Legal Advice and the Role of Your Trusted Real Estate Partner

Regardless of the circumstances and as highlighted above, it is always wise to seek legal advice before attempting to back out of a real estate deal. Real estate laws and regulations can be complex and can vary over time. Legal professionals can provide you with up-to-date information and guide you through the process.

When it comes to real estate transactions in Alberta, having a reliable partner by your side can make all the difference. At Forum Law, we specialize in real estate law and are committed to helping our clients navigate the complexities of property transactions with confidence and peace of mind.

Our experienced team of real estate lawyers understand the unique aspects of Alberta’s real estate laws and can provide you with the legal expertise you need to make informed decisions. Whether you are considering a new home purchase, an investment property, or need assistance with any aspect of real estate law, we are here to guide you through every step of the process.