Must a Seller Act in Good Faith to Disclose Pre-Closing Property Damage?

In Bilotta v. Booth, the Ontario Court of Appeal considered the scope of a seller's obligation to act in good faith in connection with its pre-closing disclosure to buyers that there had been some unexpected damage to the property.

The buyers had signed an agreement of purchase and sale to buy the seller's house for $750,000. About two weeks before the scheduled July 7, 2017 closing, the sellers' basement was flooded. A contractor performed emergency repairs, and soon after that the sellers received almost $15,000 from their insurer toward the cost of a more permanent fix.

The sellers waited until the day before closing, July 6, 2017, to advise the buyers of the flood and insurance funds. This prompted the buyers to ask for at least a one-week closing date extension, as they wanted to have a qualified home inspector assess the damage. During negotiations through their respective lawyers, the sellers provided an adjuster's report, took the position that there was no substantial damage and indicated their intention to close on July 7th as planned.

When that day came, the buyers complained again about the last-minute notice and again asked for time to do an inspection. The buyers offered to either: (1) extend the closing and renegotiate the price after inspection; or (2) close the deal as scheduled, but reduce the price by $50,000. The sellers agreed only to extend the closing somewhat, but did not agree to either proposals for a price reduction. The seller did however offer to pay the storage costs for the buyers' belongings.

Despite the sellers' expressed readiness to complete the transaction on the new date, the deal still did not close. The sellers re-listed the house, and were only able to sell it about a year later for $100,000 less than the buyers had originally agreed to pay.

The buyers and sellers each blamed the other for the aborted sale and went to court for a resolution. The sellers sought $128,500 in damages, reflecting $28,500 in expenses plus the $100,000 for the shortfall in the sale price. The buyers asked for the return of their $30,000 deposit and some additional damages.

The lower court judge sided for the buyers, ruling that the sellers had breached the agreement with their late-breaking revelation of the flood damage a mere day before closing. This timing did not give the buyers a meaningful opportunity to consider whether to potentially exercise their contract termination rights. The judge ordered the sellers to return the $30,000 deposit.

On later appeal, the Court of Appeal overturned that earlier ruling, finding that it was actually the buyers who were in breach, because they had no right to terminate the deal. The insurance clause in the standard form agreement of purchase and sale was the key to the appeal outcome; it stated that in the event of "substantial damage", the buyers may either: (1) terminate the agreement and have their deposit returned; or (2) take the proceeds of any insurance and complete the purchase. Typically, in scenarios involving more major unexpected pre-closing damage to properties, buyers would be entitled to a reasonable amount of time to sort out what to do and to obtain details of the insurance coverage from the seller. They could then make an informed election on whether to terminate or go forward with the purchase.

But in this case, the flood damage was only minor, so the buyers were not entitled to added time. On the eve of closing, they knew the insurer had issued a $15,000 cheque to cover the repairs and were also given the adjuster's report. They knew or ought to have known the damage was not "substantial", which term was the trigger for their right to elect to either terminate or accept the insurance proceeds and still close. There was no such election to be made in this case, so the buyers were not entitled to reasonable extra time to assess their position. Their refusal to close on the newly-extended date was a repudiation of the contract. In contrast, the sellers had acted reasonably throughout, by making reasonable offers to extend.

In light of the buyers' breach, the sellers then had two choices: (1) either accept the buyers' repudiation and terminate the contract; or (2) reject it and keep the contract alive. They decided to do the former. They terminated the contract, which allowed them to sue for damages from the buyers. The Appeal Court allowed the appeal and awarded the sellers damages representing the difference between the contract price and the amount they realized on resale of the house, i.e. $100,000, with the buyers' $30,000 deposit to be credited against that amount. See Bilotta v. Booth, 2020 ONCA 522.