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Builder Too Strict in Demanding Evidence of Buyers’ Financing

In the Fall of 2016 two buyers, who were spouses, agreed to purchase a yet-to-be-built townhouse condominium from a seller, and tendered an initial deposit. Construction was slated to commence imminently, with occupancy set for Spring of 2019.  Due to construction delays, the closing was extended to March of 2020.

The agreement required the buyers to confirm their fiscal wherewithal within 30 days of signing, with evidence that they had the financial ability to complete the transaction on an “all-cash basis” – either wholly from their own savings and investments, or else through third-party mortgage financing. This involved providing the seller with certain evidence, including a copy of their lender’s binding, unconditional mortgage or loan commitment, evidence of their annual income, and other personal information.

The buyers duly complied by submitting a letter from their mortgage broker confirming loan pre-approval. At that time, the seller accepted this in satisfaction of the buyers’ contractual duty, even though the mortgage was subject to minor conditions.

More than a year later, the seller suddenly introduced new “hoops” for the buyers to jump through, purportedly to satisfy the financing sufficiency clause.  

First, the buyers received a letter sent to all 116 purchasers in the townhome project, asking for copies of their binding and unconditional mortgage commitments. Although the buyers complied by tendering theirs, the seller rejected it because the pre-approval came from a broker, not the lender, and was conditional.

The buyers then arranged immediately for a new mortgage commitment, and supplied proof to the seller.  That loan also contained a condition respecting the sale of their existing home, so the seller rejected that arrangement as well.  The buyers tried again, submitting proof of an unconditional mortgage commitment, but one that listed the wife’s parents as co-borrowers.  The seller also turned this down since the wife’s parents were not parties to the agreement.  It refused to let them be added on title.

In April 2018 – which was still a full two years before the scheduled closing – the seller gave the buyers formal notice that it considered them in breach of the agreement. It purported to unilaterally terminate the deal, and keep the deposit.

The buyers sued. The key issue for the court was whether the buyers had adequately demonstrated their financial ability to close the transaction, as the purchase agreement required them to do.  

The court noted the buyers had tried to provide the seller with the needed information over the course of many months. This included a pre-approval letter from the mortgage broker and two mortgage commitments from a bank.  Despite their increasing frustration at the seller’s demands, they also tendered evidence of their savings, RRSPs and TFSAs, investments portfolio, pay stubs, financial statements, and their current property appraisal value.  Finally, they also offered a full mortgage commitment with the wife’s parents as co-borrowers. The seller was still not satisfied.

Against this background, the court examined the agreement’s clause itself.  The seller could unilaterally terminate the deal if the buyers failed to provide financial information or procure the needed financing within the stated time-periods. Although the seller had discretion in assessing the sufficiency of the buyers’ information, it also had a duty to act honestly and in good faith – which was to be assessed objectively.

The court heard evidence that even at the time of the current hearing, the seller’s land was still vacant, which led to the inference that the seller had no true intent to continue building a condominium when it purported to unilaterally terminate the buyers’ agreement. As the court put it:

[The seller] asked for an unconditional mortgage commitment for the purchase of a unit in a development when ground had not been broken and completion was years away.

The seller’s refusal to accept the two mortgage commitments from the lender bank, and to refuse to allow the wife’s parents to be added as co-purchasers, was also unreasonable.  Conversely, the buyers’ attempts to comply with the agreement, both in providing documentation and providing mortgage commitments were bona fide and wholly reasonable. They were entitled to have their deposit returned. See Ania v. Spice Danforth Inc., 2019 ONSC 572.