Mortgage Interest - Claim for Damages Rejected Despite Buyer's Default #295

By Gerry Neely
B.A., LL.B.

"The evidence of Ms. Lederman is compelling as to the importance of exposure to the widest possible market through the MLS®. It presents a simple, economical, and effective method for marketing a property. It has many advantages and no obvious disadvantages. It is the more important and beneficial to a seller in a difficult market."

This testimonial to the effectiveness of Multiple Listing Service® (MLS®) was made by a judge in a case where a buyer refused to complete the purchase of a residence and the seller sued for damages. The residence had been listed and relisted on MLS® for a period of approximately ten months, initially at the price of $5,080,000. That price was reduced successively to $4,830,000, then to $4,480,000 and ultimately the residence sold for $3,900,000.

Following the buyer's default, the seller resumed the marketing of the property at the price of $4,480,000, under the MLS® contract in existence at the date of default. It expired approximately two months later and five months elapsed before the residence was relisted at $3,900,000. During that period the promotion of the sale of the residence was restricted to the licensee's lawn sign and limited advertising.

The residence sold in approximately 3 1/2 months for $3,425,000. The seller claimed for the difference in the sale prices, namely $464,000 net of commission, loss of investment income on the net proceeds of sale, and mortgage interest payments of approximately $115,000.

The buyer's only defense was that the seller was not entitled to all of the damages claimed because the seller had not taken all reasonable steps available to him to reduce his loss. The buyer's lawyer argued that if the residence had been relisted at $3,900,000 when the buyer defaulted, it might have sold at a price close to $3,900,000, and closed within a short period of time.

Ms. Lederman, a member of the Real Estate Board of Greater Vancouver, had given evidence concerning the listing process, including the availability of the Vandat computer database and the MLS® catalogue to all members of the Board. Based upon this evidence, the judge held that the seller's failures to continue to advertise on MLSO and to adjust the selling price downward in a falling market were breaches of the seller's duty to mitigate his loss.

By analysing the intervals of time between price reductions and pro rating the difference between the two sale prices, the judge concluded that the residence would have sold four months earlier than it did at a price of $3,600,000. This reduced the seller's claim to $289,000.

The next major claim for damages was the loss of interest on the investment that could have been made if the seller had received the net sale proceeds of approximately $1,750,000. Interest on that amount, at Registrar's rates, was ordered to be paid to the seller by the buyer.

The final claim was for the mortgage interest payments of approximately $115,000, a claim that could only succeed if these damages were reasonably foreseeable by the parties at the time the Contract of Purchase and Sale was signed. There are some damages, such as the lower price on resale and the loss of investment income, that are reasonably foreseeable because they are the obvious results of a buyer's failure to complete. However, since not all sellers have mortgages, damages for mortgage interest payments are not reasonably foreseeable. They are recoverable only if the buyer had actual notice of the seller's mortgage. There was no evidence of this and the claim for mortgage interest was rejected. ¹

There will be transactions, such as commercial properties or sales by developers, where it would be prudent to give actual notice of the financial charge to the buyer. The notice could be given through the addition to the Contract of Purchase and Sale of wording such as the following: "The seller is relying upon the receipt of the purchase price to clear the title of an existing mortgage."

Some thought must be given as to who initiates this addition. A buyer's agent would normally not recommend the use of this clause to a buyer, because it benefits the seller only.

On the other hand, a listing agent would prefer to have this clause already part of the offer presented by the buyer because otherwise, its addition would constitute a counter-offer.

Resolution of the issue is best decided between the agents for the parties. Two possible solutions might be: a discussion between the two agents before the offer is prepared; or, inserting the clause in the MLSO information filed by the listing agent, noting that it is included at the request/insistence (your choice) of the seller. After all, a buyer does not offer to purchase property while expecting to default.

1.

Onta Holdings Inc. v. Bermadette Bonosusatya, S.C.B.C., Vancouver Registry C964712, Reasons for Judgement, August 27, 1998.

To subscribe to receive BCREA publications such as this one, or to update your email address or current subscriptions, click here.

Without limiting the Terms of Use applicable to your use of BCREA's website and the information contained thereon, the information contained in BCREA’s Legally Speaking publications is prepared by external third-party contributors and provided for general informational purposes only. The information in BCREA’s Legally Speaking publications should not be considered legal advice, and BCREA does not intend for it to amount to advice on which you should rely. You should not, in any circumstances, rely on the legal information without first consulting with your lawyer about its accuracy and applicability. BCREA makes no representation about and has no responsibility to you or any other person for the accuracy, reliability or timeliness of the information supplied by any external third-party contributors.