Purchasing a home in Canada is no small feat. With the high cost of owning a home, some people may not qualify for a mortgage. It’s essential to determine this before signing an Agreement of Purchase and Sale to avoid any unintended consequences or real estate disputes that may stem from a failure to obtain a mortgage.
In a recent case before the Ontario Court of Appeal, a couple appealed a decision that lost them their down payment and saddled them with hefty legal costs.
The couple was unable to secure mortgage pre-approval
In Leaf Homes Limited v. Khan, a couple met with a homebuilding corporation, Leaf Homes Limited, after they learned of the corporation’s new development. The couple had moved to Canada in 2003 and 2004, and while Mr. Khan spoke English proficiently, Ms. Khan’s English was limited. Ahead of the meeting with Leaf Homes Limited, the corporation sent the Khans an email containing an Agreement of Purchase and Sale. The representative of Leaf Homes Limited instructed the Khans to bring the Agreement to the appointment with them, as well as a mortgage pre-approval, post-dated cheques, and identification.
As the Khans were under the impression the meeting was just to collect information about the development, they did not bring the postdated checks and did not seek mortgage pre-approval. They were shown the project and asked to choose a lot. They then met with a sales associate.
The Khans alleged that the sales associate pressured them into entering the agreement. She told them that if they could provide a 20 percent down payment, they would be able to secure financing. She also suggested that Leaf Homes Limited would help them secure mortgage pre-approval if they were unsuccessful on their own. When they left, they had signed the agreement and later arranged to provide the corporation with six cheques (five of them post-dated) for $30,000 each. However, when Mr. Khan sought to secure financing, he was unsuccessful and did not have the funds to pay the difference between the appraisal value and the home’s purchase price. He notified Leaf Homes Limited of this issue in August 2018.
A default judgment was awarded to the corporation
In response to the Khans’ anticipated breach of the agreement of purchase and sale, Leaf Homes Limited commenced an action seeking damages for the breach and costs in September 2018. When the Khans did not reply, the corporation noted them in default a month later. The property was sold in February 2019 for $500,000 less than the asking price. In April 2019, Leaf Homes Limited received a default judgment against the Khans for $407,903.92 in damages and $7,000 in costs.
The Khans learned of the proceedings in May 2019 when Mr. Khan’s bank account was garnished, and a writ of seizure and sale of their home had already been filed. Mr. Khan could not understand the copy of the default judgment and other court documents left in his mailbox. He immediately sought counsel, who arranged for a motion to set aside the default judgment and permission to file a statement of defence and counterclaim. The counterclaim sought to recover the Khans’ $180,000 down payment and the $7,016.15 they had provided for upgrades.
The motion judge set aside the default judgment in part
The motion judge considered the following factors in deciding the set aside the default judgment in part so that the Khans could litigate the amount of damages:
- The Khans brought their motion promptly after learning of the default judgment.
- Since the Statement of Claim was served on “a woman in her late thirties or forties [who] answered the door,” there was no explanation for the delay in replying to it beyond hoping the problem would disappear.
- The motion judge did not accept the Khans’ defence that the sales associate had misrepresented the corporation’s willingness to help secure financing for the property. However, Leaf Homes Limited also failed to adequately mitigate its damages by selling the property years after the breach of the agreement of purchase and sale.
- The Khans would be at a disadvantage if the motion were dismissed because their bank accounts were being garnished. This outweighed the disadvantage to Leaf Homes Limited.
- The Khans had entered into an agreement without being sure they could fulfill it and sought “to delay and avoid” litigation by ignoring the Statement of Claim.
The motion judge also gave the Khans 15 days to provide submissions on costs and the corporation ten days to respond to those submissions. The Khans were not given the right of reply to Leaf Homes Limited’s submissions. In her written reasons, the motion judge ordered the Khans to pay costs on a substantial indemnity basis. In other words, they had to pay 1.5 times the equivalent of their legal fees to the winning party.
The Court of Appeal set aside the default judgment
The Ontario Court of Appeal found more than a few errors in the motion judge’s decision to only set aside the default judgment in part. Firstly, the motion judge made an error in deciding that the Khans needed to prove the success of their defence of misrepresentation. Instead, she only should have determined whether there was an air of reality to their defence. The Court of Appeal felt that there was.
Concerning the service of the Statement of Claim, the Court of Appeal noted that the process server did not provide enough information to confirm that it had actually been served on Ms. Khan, as the motion judge had assumed. In fact, she need not have considered the delay in the Khans’ reply to the Statement of Claim because, in that proceeding, the only relevant delay was the delay in responding to the default judgment. From this view, there was no delay.
The Court of Appeal also disagreed with the motion judge’s consideration of Mr. Khan’s non-attendance at one proceeding. The Court stated that it seemed like the Khans did not become aware of the claim against them until Leaf Homes Limited began enforcing the default judgment.
The motion judge’s assessment of prejudice or disadvantages the Khans would face also lacked a crucial consideration:
“[B]y permitting the appellants to only litigate the quantum of damages, she prevented them from pursuing their counterclaim. That would result in further prejudice to the appellants as they would be barred from seeking to recover the approximately $190,000 they had paid the respondent […].”
Avoid costly disputes by working with an experienced real estate lawyer
As a result of the motion judge’s palpable and overriding errors, the Khans’ appeal was allowed. The default judgment and the noting in default against the Khans were set aside. The Khans were allowed to file and serve a statement of defence and counterclaim within 10 days after the judgment. Leaf Homes Limited was ordered to pay their costs, fixed at $25,000.
While the Khans were successful in their case, real estate disputes are costly and stressful for all parties involved. Engaging the services of a skilled real estate lawyer early in the sale process helps ensure parties understand the full implications of the Agreement of Purchase and Sale. A lawyer can also help parties with mortgages and refinancing before any commitments expose either side to liability.
Contact Bader Law in Mississauga for Real Estate Advice
Bader Law represents individual and corporate buyers in real estate transactions in Mississauga and throughout the Greater Toronto Area. Our experienced real estate lawyers take strategic action to reduce risk, secure clients’ interests, and protect their financial investments. Our team reviews Agreements of Purchase and Sale, handles title insurance matters, and assists with mortgages and refinancing.
Bader Law ensures your real estate matters are tended to in a timely and professional manner. To schedule a consultation, contact us online or call 289-652-9092