Can you back out of buying a house after signing an Agreement of Purchase and Sale, commonly called an APS?
Usually, not without serious consequences. Once the conditions in the APS have been satisfied or waived, the agreement is generally binding on both the buyer and the seller.
Can a buyer back out of buying a house?
Suppose the closing date is approaching. During the final walkthrough, the buyer discovers a water leak, damaged flooring, a broken door or another problem that was not there when the agreement was signed.
Perhaps the house is much dirtier than before. The seller may also have removed an appliance or fixture that was supposed to remain, failed to complete an agreed repair or left furniture and garbage behind.
The buyer asks the seller to fix the problem or reduce the purchase price, but the seller refuses.
Can the buyer back out of buying the house?
Not necessarily.
The final walkthrough is not a second home inspection or another opportunity to renegotiate the purchase price. Its purpose is generally to confirm that the property remains in the condition required by the APS, that included items are still present and that any promised work has been completed.
A broken door, damaged floor panel, dirty house or another repairable problem may not be serious enough to allow the buyer to terminate the entire agreement. The buyer’s rights will depend on the wording of the APS and the seriousness of the seller’s breach.
What can the buyer’s lawyer do?
The buyer should take photographs and videos, obtain repair estimates where possible and contact their real estate lawyer immediately.
The lawyer may try to negotiate:
- Repairs before closing;
- A reduction in the purchase price, sometimes called an abatement;
- A credit to the buyer on closing;
- An extension of the closing date;
- A holdback; or
- Closing while preserving the buyer’s right to pursue damages afterward.
A holdback means that an agreed amount of the seller’s proceeds remains in a lawyer’s trust account until a specific repair or obligation has been completed.
However, the buyer cannot normally impose a holdback alone. It must be permitted by the APS or accepted by the seller. Simply withholding part of the purchase price could place the buyer in breach of the agreement.
What could it cost the buyer to back out?
Suppose a buyer agrees to purchase a house for $500,000 but refuses to close. The seller later sells the property for $450,000.
The buyer could be responsible for the $50,000 difference.
The buyer may also be liable for additional losses caused by the failed closing, including mortgage interest, property taxes, utilities, insurance, maintenance, additional commissions and legal expenses.
The buyer will also normally lose the deposit. However, the deposit is generally credited toward the seller’s damages rather than allowing the seller to recover the same loss twice.
Therefore, a buyer should be extremely careful before deciding to back out of buying a house over a problem that may be repairable.
Can a seller back out of selling a house?
Suppose the seller changes their mind, no longer wants to move or believes they could obtain a better price by putting the property back on the market.
The seller generally cannot cancel a firm APS for those reasons.
The seller should contact their lawyer immediately. The lawyer can review whether the APS contains any remaining condition or right to terminate, address title or vacant-possession issues and try to negotiate an extension or mutual release.
However, the buyer is not required to let the seller out of the deal and may insist that the transaction be completed.
If the seller refuses to close, the buyer may claim losses such as the additional cost of purchasing a comparable property, temporary accommodation, additional financing expenses, moving and storage costs, and other reasonable expenses caused by the failed transaction.
In some cases, the buyer may also ask the court to order the seller to complete the sale. This remedy is called specific performance, but it is not automatically available for every property.
Be careful before backing out
Whether you are the buyer or the seller, do not make a rushed decision.
Your real estate lawyer may be able to negotiate a repair, credit, abatement, extension, holdback or mutual release. If the dispute cannot be resolved, you may also need advice from a real estate litigation lawyer.
Backing out of a house purchase or sale is not a minor decision. Litigation can be expensive, stressful and slow. You could lose your deposit or face a damages claim far greater than the original problem.
I am a law student. This post does not provide legal advice and only reflects my observations as a student. For advice about your particular situation, please contact a lawyer licensed by the Law Society of Ontario.