Can a buyer back out of an accepted offer in Canada
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by Richard Morrison
- February 26, 2020
- Trends
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In the midst of a hot real estate market, where prices are skyrocketing, buyers may be eager to make an offer on their dream home. Once the buyer and seller sign a standard real estate agreement, the purchase becomes legally binding. But what happens if the homebuyer suddenly has a change of heart?
Can they back out of their accepted offer on a house in Canada? The Ontario Superior Court of Justice has stated that unless the agreement includes specific conditions, such as a financing or inspection clause, the buyer is bound to the contract terms.
So, before diving headfirst into the home buying process, it’s important to understand your rights and the potential risks involved.
Key Takeaway
While possible, it’s complicated and risky for a buyer to withdraw from an accepted offer. They may forfeit deposits or be sued if the deal falls through. Contingencies in the purchase agreement, like satisfactory inspections, are key “outs” for buyers. Understand all terms before signing and consult real estate experts if thinking of backing out.
In January 2023, British Columbia implemented a new “home buyer rescission period” (HBRP) giving buyers an “out” if they act within 3 days.
Top Reasons a Buyer May Want to Back Out
It’s common to experience some buyer’s remorse or cold feet when making major purchases. Various scenarios could make buyers reconsider after their offer gets accepted:
- Market fluctuations – Housing prices dropped significantly since they made their offer. Now the neighbor’s similar home just sold for way less than theirs. This causes them to feel they overpaid.
- Getting caught up in bidding wars – In a frenzied seller’s market, buyers often get emotionally swept up in bidding wars, pushing their budget to the limit to beat competing offers. Later, when the excitement wears off, they realize they overbid and overpaid.
- Changing financial circumstances – Some buyers may lose their job or take on additional debts that make the mortgage unaffordable between the time of offer and closing.
- Failure to sell current home – Often buyers’ purchases are contingent on selling their current house first. If that sale falls through, they may no longer be able to afford the new purchase.
- Unexpected property condition issues – The home inspection might reveal major structural, electrical, or other problems the buyer is unwilling or unable to pay to fix.
- Changing needs – Buyers’ needs sometimes change between the offer and closing. For example, a new baby on the way may require more space, or a job transfer may force a move out of town.
Essentially, anything that changes a buyer’s financial position, needs, or the circumstances of the purchase after offer acceptance could cause cold feet. It’s an emotional rollercoaster.
British Columbia’s New “Cooling-Off” Period
In January 2023, British Columbia implemented a new “home buyer rescission period” (HBRP) giving buyers an “out” if they act quickly. This brief window allows buyers to cancel accepted offers on residential properties unconditionally with no penalties.
Also referred to as the “cooling-off period,” the HBRP provides a 3-day decision-free timeframe after an offer is accepted. During this time, buyers can rethink their decision with a clear head before proceeeding.
The cooling-off period applies to most residential property types:
- Detached homes
- Semi-detached homes
- Townhouses
- Duplexes and apartments
- Residential strata lots
- Manufactured homes on land
- Cooperative housing with occupancy rights
The implementation of the HBRP marks an important change in BC real estate law. It aims to protect buyers from rushed, pressured decisions they may regret. However, British Columbia is currently the only province with such protections.
Potential Consequences of Backing Out of an Accepted Offer
In most of Canada, once an offer is accepted and the purchase agreement signed by both parties, it becomes a legally binding contract. If a buyer later backs out of the deal, they can face stiff consequences:
- Losing the deposit – Buyers typically submit a deposit between 1-3% of the total purchase price along with their offer to show the seller they are serious and committed. If the buyer withdraws from the deal, this deposit money is forfeited to the seller.
- Paying the seller’s costs – The buyer may be liable to reimburse the seller for expenses like inspection fees, legal fees, property appraisals, staging and marketing costs, property taxes, utilities, and insurance costs. These can tally up to thousands.
- Getting sued for damages – The seller could sue the buyer for losses incurred if they have to relist and sell the home for a lower price in a declining market. For example, if the first accepted offer was $800,000, but the market shifted and the seller had to relist and sell for $750,000, they may sue the buyer for the $50,000 loss.
- Hurting your credit score – Defaulting on a signed real estate contract could also damage the buyer’s credit standing and ability to secure loans in the future.
- Strained business relationships – Backing out of a real estate deal causes major headaches for the seller, real estate agents, lawyers, lenders, and others. This can permanently damage business relationships in the local housing market.
Buyers must carefully weigh these potential liabilities before deciding to withdraw from an accepted offer. Between deposit losses, reimbursement of seller costs, and lawsuits, damages for the buyer can add up to hundreds of thousands based on financial losses to the seller.
Legal Circumstances When Buyers Can Back Out
While the consequences make it undesirable, there are certain legal circumstances where a buyer can back out of an accepted real estate offer without penalty:
Contingencies Fail
Most Canadian real estate offers contain a variety of “subject” conditions or contingencies the seller must meet for the deal to become firm. Common conditions include:
- Financing – The deal is contingent on the buyer securing financing approval for a mortgage by a set date. If their mortgage application gets denied, the deal can be cancelled.
- Home inspection – The buyer’s offer is contingent on a professional home inspection not turning up any major structural, electrical, plumbing, or other issues. If serious problems are found, the buyer can walk away.
- Sale of current home – Buyers sometimes make their purchase offer contingent on selling their current home first. If they fail to find a buyer, they can withdraw from the new purchase.
- Title checks – Contingent on the title having no undisclosed liens, easements, or other issues.
- Zoning approval – For cases where zoning permits are required.
If any buyer contingencies fail to be met by the stated deadline, the real estate contract is rendered null and void. The buyer can then cancel the offer without legal penalty. However, they must adhere to all notice requirements in the purchase agreement.
Material Seller Misrepresentation
If a buyer can demonstrate the seller deliberately misrepresented or hid key information that affected the property’s value, they may use it as grounds to exit the deal. However, misrepresentation disputes often end up in court since they require clear evidence the seller lied or omitted facts intentionally. There is a high bar of proof.
Damage to the Property
If the home suffers major uninsured damage from causes like fire, flooding, or vandalism before closing, either the buyer or seller can opt out of the contract.
Title or Ownership Issues
If problems arise like undisclosed liens or encumbrances found against the property’s title, either party can cancel the deal and notify their lawyer. This also applies if disputes over who legally owns the property arise.
Failure to Make Agreed Upon Repairs
If the purchase contract stipulated the seller must make certain repairs prior to closing, their failure to fix those issues gives the buyer grounds to withdraw their offer.
Change in Zoning Laws
If an unexpected change in municipal zoning occurs, rendering the property illegal for its intended use, the buyer could exit the contract.
Mediated Agreement
The buyer and seller always have the option to mutually sign an agreement to terminate the purchase contract if one party wants out, provided both sides consent.
Death of a Party
If the buyer or seller passes away before closing, their estate can opt to cancel the real estate transaction on their behalf.
So in limited scenarios where contingencies fail, circumstances change, or the seller breaches the agreement, a buyer may legally back out of an accepted offer without financial penalty. But they still risk damaging business relationships, especially if they don’t communicate openly.
The Deposit’s Important Role
The “good faith deposit” submitted with an offer serves an important purpose beyond showing the buyer’s sincerity. This deposit, typically ranging from 1-3% of the purchase price, is held in trust by the seller’s real estate brokerage until the sale closes. It usually becomes non-refundable if the buyer withdraws from a firm deal.
Legally, if the buyer backs out of an accepted offer for any reason other than failed contingencies, the seller can retain the deposit as compensation for taking the property off the market. This covers their losses from potentially missed opportunities to sell to other buyers.
Once both parties sign the purchase contract, the chances of the buyer getting their deposit money back are very slim. The deposit is intended to discourage buyers from cancelling firm deals on a whim.
If a buyer does decide to withdraw after contract signing, they should immediately consult a knowledgeable real estate attorney before notifying the seller or taking further steps. But they shouldn’t count on recovering their deposit funds.
How Buyers Can Avoid the Pain of Backing Out
A few preventative measures can help buyers avoid the headaches and liabilities of cancelling an accepted real estate offer down the road:
- Only bid and pay what you know you can truly afford. Don’t let emotions cloud your judgment and overextend your budget, or you may end up with regrets.
- Add contingencies to your offer such as financing, home inspection, or sale of your current home. These provide legal “outs” if issues arise.
- Carefully review all terms in the purchase agreement before signing and ask your real estate lawyer to clarify anything you’re unsure about. Don’t gloss over important details in your excitement.
- Take time to consider and don’t rush into making an offer, especially in competitive markets. A better suited home may hit the market soon.
- Hire a knowledgeable local real estate agent who can guide you on fair prices, negotiate well on your behalf, and avoid pressuring you into poor decisions.
- Consult a real estate legal specialist who will protect your interests in the transaction. Don’t solely rely on the seller’s lawyer.
What Happens When the Seller Backs Out?
Just as buyers sometimes want to back out of a real estate transaction, many sellers experience their own remorse or change of plans after accepting an offer. Sellers are also legally bound once they sign the purchase contract. So what happens if the seller is the party who wants to withdraw?
If the seller simply changes their mind and refuses to complete the sale after accepting the buyer’s offer, they can face similar consequences:
- The seller must immediately return the full deposit amount the buyer originally submitted with their offer, including any additional deposits paid.
- The seller will usually have to reimburse the buyer for any inspection costs, appraisal fees, and other expenses the buyer incurred as part of their due diligence once the offer was accepted. These costs can pile up.
- As with buyers, the seller risks being sued by the buyer for losses and damages resulting from their failure to close. This includes declining property value if housing prices drop before they can relist and resell.
- The buyer could file a “lis pendens” on the property’s title, restricting the seller’s ability to attempt selling it to someone else until the dispute is settled.
- If the seller originally hired their own real estate agent to market the home, that agent may sue the seller for their lost commission and any other costs if the deal falls through. Their contract is with the seller, not buyer.
The seller is also released from the contract only if contingencies fail or other conditions described earlier are met. But they generally can’t just walk away from a firm deal without good cause if they want to avoid legal and financial headaches.
Dos and Don’ts for Buyers Considering Backing Out
Since withdrawing from an accepted real estate offer has so many legal implications, there are a few key dos and don’ts buyers should keep in mind:
DO:
- Take time to objectively weigh all your options before making any final decisions. Don’t let emotions drive you.
- Have your real estate lawyer thoroughly review the purchase contract before signing to negotiate contingencies that protect you.
- Formally notify the seller in writing according to the purchase agreement’s procedures if you decide to withdraw your offer.
- Make sure you have documented evidence if asserting that the seller misrepresented the property.
- Consider mediation with the seller and brokers to amicably negotiate cancelling the deal before unilateral withdrawal.
DON’T:
- Back out just because of cold feet or general buyer’s remorse. These aren’t legally sufficient reasons.
- Make a rash decision to withdraw in an anxious or stressed state of mind. Seek objective counsel first.
- Delay notifying the seller of your intentions if you do decide to cancel. Be proactive.
- Underestimate the legal complexities and financial risks of withdrawing from a firm deal.
- Go silent and stop communicating with the hope the deal will just fall apart on its own.
Can the Buyer and Seller Renegotiate After Offer Acceptance?
What if the buyer has second thoughts but still likes the home? Is it possible to renegotiate the terms of the purchase rather than withdrawing completely?
If both parties are willing to work together, the buyer and seller can amend the accepted real estate contract through a formal addendum, provided the deal hasn’t closed yet. Typical terms open to negotiation include:
- Purchase price – The buyer may ask the seller to reduce the price if housing market conditions changed.
- Inspection repairs – The seller may agree to cover more repairs flagged in the inspection report.
- Closing date – Move the closing date up or back if needed to secure financing.
- Included items – Renegotiate what furnishings or items will stay with the property.
- Interim occupancy – Arrange for the buyer to move in early before closing as a tenant.
To successfully amend a Canadian real estate contract after acceptance, good faith negotiation and mutual consent are imperative. Both parties must sign any formal addendums and abide by original notice terms.
However, the seller is not obligated to renegotiate or accept changes once the initial document is signed. If no agreement can be reached, the buyer’s options are to move forward or withdraw from the contract per its cancellation terms.
Using Real Estate Agents Skillfully if Reneging
Ending up in a position where you need to cancel an accepted real estate offer is never ideal. But how you handle it matters a lot, especially for your agent relationships. Here are some tips:
- Have an open, candid talk with your agent to discuss your concerns before making firm decisions. Take their advice seriously.
- If you do cancel, be honest with agents about the reasons to maintain trust. Don’t leave them in the dark.
- Express appreciation for the agents’ work and time invested, even if the deal falls through.
- Keep lines of communication open rather than cutting contact. Your agent depends on commissions.
- Don’t pressure agents to engage in unethical practices like hiding your intent from the seller.
- Ask your agent for advice to avoid this situation in the future. Learn from the experience.
While frustrated agents will want to know why you’re backing out, resisting the urge to make rash choices can improve outcomes for everyone. Keep your agent relationships intact.
Frequently Asked Questions
Q: Can a buyer back out of an accepted offer on a house in Canada?
A: Yes, it is possible for a buyer to back out of a real estate deal after their offer has been accepted, but it may come with legal and financial consequences.
Q: What is a contingency in a home purchase?
A: A contingency is a condition that must be met in order for the homebuyer to proceed with the purchase. Common contingencies include the buyer obtaining financing, a satisfactory home inspection, or the sale of the buyer’s current home.
Q: What are the risks of backing out of a real estate deal?
A: Backing out of a real estate deal can have serious consequences. If the buyer breaches the contract without a legitimate reason, they may lose their earnest money deposit and could potentially be sued by the seller for breach of contract.
Q: Can a buyer back out of a deal due to unforeseen circumstances?
A: It depends on the specific contract terms and the laws in the province. If the agreement of purchase and sale allows for a buyer to back out without penalty in certain circumstances, such as a financing contingency or a home inspection contingency, then it may be possible to back out of the deal.
Q: What are the financial consequences of backing out of a real estate purchase?
A: The financial consequences of backing out of a real estate purchase can vary depending on the specific circumstances. In some cases, the buyer may lose their earnest money deposit, which can amount to thousands of dollars. If the seller eventually sells the property for a lower price than the original offer, the buyer may be responsible for paying the difference.
Q: Should I consult with a real estate lawyer if I want to back out of a deal?
A: It is highly recommended to consult with a real estate lawyer before making any decisions. They can help you understand the legal and financial consequences of backing out of the deal and provide guidance on the best course of action.
Q: What is an agreement of purchase and sale?
A: An agreement of purchase and sale is a legally binding contract between a buyer and a seller that outlines the terms and conditions of the real estate transaction. It includes details such as the purchase price, closing date, and any contingencies or conditions that must be met in order for the sale to proceed.
Q: Can I back out without penalty if the seller knowingly misrepresented the property?
A: If the seller knowingly misrepresented the property, it may be possible for the buyer to rescind their offer without penalty. However, it is advisable to consult a real estate lawyer to determine the best course of action in such circumstances.
Q: What are the steps involved in a real estate purchase?
A: The steps involved in a real estate purchase typically include finding a property, making an offer, negotiating the terms of the agreement of purchase and sale, conducting inspections and due diligence, securing financing, and finally, closing the deal.
Q: What should I do if I want to back out of a deal?
A: If you want to back out of a real estate deal, it is advisable to review the contract terms and consult with a real estate lawyer. They can help you understand the potential consequences and guide you through the process of rescinding your offer, if possible.
Conclusion and Key Points
Accepting a real estate offer is a thrilling yet stressful time for both buyers and sellers. Emotions and pressures run high. In some cases, buyers may later regret their offer or have difficulty securing financing. Sellers also sometimes back out of signed deals at the last minute.
Canada’s laws make both buyers and sellers legally bound to a purchase contract once signed and deposits paid. Withdrawing from firm deals involves financial and legal risks like losing deposits, paying seller costs, or getting sued for damages.
However, contingencies provide buyers an “out” if they fail, like home inspections revealing problems or failure to obtain financing. Buyers shouldn’t make offers lightly and should understand their rights and obligations before signing a contract. Consulting real estate attorneys and sticking with decisions reduces headaches for everyone down the road.
The key takeaway? While possible, it’s complicated and risky for a buyer to withdraw from an accepted offer. They may forfeit deposits or get sued if the deal falls through. Contingencies in the purchase agreement, like satisfactory inspections, are key “outs” for buyers. Understand all terms before signing and consult real estate experts if thinking of backing out.
Sources:
https://www.bcrea.bc.ca/advocacy/bcs-home-buyer-rescission-period-your-questions-answered/
https://www.bcfsa.ca/public-resources/real-estate/home-buyer-rescission-period
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