Walking Away from a Preconstruction Deal in Ontario: What You Need to Know
Purchasing a preconstruction home or condo in Ontario can be an exciting journey that takes many years. You sign the Agreement of Purchase and Sale (APS) early, pay your deposits, and wait patiently for the closing date.
However, life happens. Financial situations change, interest rates rise, or the unit's final appraised value may be lower than your contract price. If you find yourself in a situation where you cannot secure the financing needed to close, it can feel like the world is collapsing.
The most important thing to know is this: You cannot simply walk away from a preconstruction contract without serious financial and legal consequences.
1. The Legal Reality: Why You Can’t Just Forfeit the Deposit
A common misconception is that if you can't close the deal, you only lose the deposit money you’ve already paid to the builder. Unfortunately, this is usually wrong.
When you sign a preconstruction Agreement of Purchase and Sale, you are entering into a legally binding contract. If you fail to close the deal on the scheduled date, you are in breach of contract.
In Ontario, a builder has two main legal remedies against a defaulting buyer:
Consequence A: Forfeiture of the Deposit
The first thing that happens is you forfeit (lose) every dollar of your deposit. Courts consistently treat the deposit as a guarantee of your intention to complete the purchase, and the builder is entitled to keep it.
Consequence B: Being Sued for Damages
This is the most critical risk. After you default, the builder has a legal duty to minimize their loss by attempting to resell the property quickly.
If the builder is forced to resell the unit for a lower price than what you agreed to pay, they have the right to sue you to recover that difference (the "shortfall").
The Lawsuit Calculation is simple, but often devastating:
Buyer's Liability = Original Contract Price - New Resale Price + Carrying Costs + Legal Fees
In a cooler market where property values have declined since you signed the deal years ago, this shortfall can easily add up to tens or even hundreds of thousands of dollars, on top of the deposit you already lost.
Example:
Your Original Price: $1,000,000
Your Deposit Paid: $100,000 (Lost)
Builder’s New Resale Price: $900,000
Shortfall: $100,000 (The difference the builder sues you for)
In this scenario, your total loss is $100,000 (deposit) + $100,000 (shortfall), plus the builder’s legal and carrying costs.
2. Proactive Options to Avoid Default
If you anticipate problems closing, do not wait until the last minute. The earlier you engage with a lawyer, the more options you will have to mitigate your risk.
Here are the primary strategies to explore with legal counsel before the closing date:
Assignment Sale
How it works: You sell your contractual rights and obligations to a new buyer. The new buyer steps into your place and closes the deal. This is subject to the builder's approval and fees.
Key benefit: You avoid the risk of litigation and recover your deposit (or part of it, depending on the market).
Negotiate an Extension
How it works: If you need more time to secure financing, your lawyer can request an extension from the builder. Builders typically charge a daily fee (e.g., $200-$500 per day) but may agree to avoid the hassle of a lawsuit.
Key benefit: Buys you crucial time to arrange alternative financing or sell the contract.
Mutual Termination
How it works: In some cases, your lawyer can negotiate a clean break with the builder, known as a Mutual Release. The builder may agree to keep the deposit in full in exchange for agreeing not to sue you for future damages.
Key benefit: Provides certainty; you lose the deposit but walk away entirely, protecting yourself from a potentially massive lawsuit.
Alternative Financing
How it works: Explore options outside of major banks, such as B-lenders or private lenders. While these come with higher interest rates, they may provide the necessary funds to close the deal, allowing you to eventually sell the unit yourself when the market improves.
Key benefit: Allows you to fulfill your contractual obligation and avoid the litigation risk.
3. What to Do Immediately
If your closing date is approaching and you are concerned about your ability to secure funding, take these three steps:
Do Not Speak to the Builder Alone: Never tell the builder or their sales agent that you are thinking of defaulting. Consult with your lawyer first. Any communication you have with the builder can be used against you later in court.
Gather All Documents: Find your original Agreement of Purchase and Sale, all amendments, deposit receipts, and any correspondence related to the closing date.
Call a Real Estate Lawyer Specializing in Litigation: A lawyer can review your contract, assess your potential liability, and immediately open negotiation channels with the builder to pursue an assignment sale or a mutual termination agreement. This immediate legal intervention is your best protection.
If you are worried about your closing, don't wait until it's too late—contact our firm today for a confidential consultation to protect your financial future.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Every preconstruction contract is unique. If you are facing difficulties closing a preconstruction deal in Ontario, you must seek immediate legal counsel to understand your specific rights and obligations.
