Sep 01, 2010

Collapsed Sale — Remarketing and Reasonable Mitigation #440


By Edward L. Wilson

The falling market of 2008 saw a number of buyers refusing or unable to complete their purchases and sellers were often electing to terminate their contracts, relist and sell their property. Sellers then often sued the defaulting buyer for damages, being the difference between the original sales price and the ultimate sale price and related costs.

In relisting their property, sellers are complying with their obligation to mitigate their damages. Care must be taken when relisting or reselling properties in such circumstances however, as demonstrated in a recent BC case.1

As the closing date of November 13, 2008 approached, the buyer who had agreed to purchase the home for $845,000 was not in a position to close; she had not sold her home and asked for an extension. The seller, who needed the sale proceeds to close on her new purchase, refused to grant an extension. The seller relisted the property on November 14, 2008 for $849,000.

The original buyer submitted a new offer at the original price but with a later closing date which was not accepted. The seller accepted a new offer from a different buyer on December 1, 2008 with a completion date of December 3, 2008 and a purchase price of $670,000, resulting in a net loss of $169,356.25 to the seller. The seller then sued the original buyer to recover her damages, only a portion of which would be satisfied by the original deposit of $30,000.

The defaulting buyer said that the seller did not act reasonably in mitigating her damages and acted prematurely and unreasonably when she sold the property to the second buyer at a bargain.

In accordance with the established case law, the courts held that the burden lay with the seller to prove her damages and that her mitigation was reasonable. The Court agreed with the original buyer and found that the seller did not act reasonably in accepting the new offer. The Court believed the seller acted precipitously in selling the property at a price significantly below the fair market value of $845,000 as established in an appraisal dated November 21, 2008. The Court acknowledged that the seller needed the funds to close on her purchase, but found she did not pursue the other options available to her such as interim bridge financing or negotiating further with the original buyer.

While the seller's real estate agent said the sale price under the second contract was reasonable for the market at that time, the seller provided no appraisal evidence supporting that position. Indeed, the only appraisal evidence submitted to the Court was the November 21 appraisal, indicating a fair market value of $845,000.

The Court felt the seller could have renegotiated her deal with the first buyer which would have been a more reasonable solution. The Court held that her failure to act reasonably meant the buyer was not required to pay for her avoidable losses and her claim was dismissed by the Court.

All REALTORS® and their clients should take note of this case when marketing properties in such circumstances. The seller must act reasonably when mitigating losses and should seek legal advice as they develop a marketing strategy and consider any new offers for their property.

A rushed sale, which may seem reasonable in light of circumstances, may prevent a successful damages claim later. If an offer dramatically lower than the original price is accepted, a formal independent appraisal supporting that lower price as being reasonable may be necessary to support the damage claim in any subsequent court action.

 1. Hargreaves v. Brar, 2010 BCSC 538.

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