Saturday, June 18, 2005


Due Diligence in a Real Estate Transaction

As time goes by and real estate markets become hotter and hotter the temptation is there for prospective Purchasers to cut corners while involved into a legally binding accepted offer. This may not be the most prudent venue to follow, as illustrated by this very recent Court case.
The Buyer made an offer to purchase a condo in Yaletown (Vancouver, BC) which contained several subject-to clauses, one of which being subject to financing. The condition precedent stipulated that the Buyer would be applying for a loan in the amount of CAD $150,000. When the lender sent in an appraiser, the appraiser informed the Purchaser that he was in fact over-paying for the suite and that the appraisal amount would be less than the purchase price. The Buyer proceeded with the application for mortgage financing but for a loan in the amount of CAD $250,000, not the CAD $150,000 proscribed in the contract. The Buyer, under no circumstances, could possibly qualify for any such amount. Additionally, there was a delay in applying for the mortgage and the Buyer did not ask for an extension of the subject. Ultimately the Buyer did not remove the financing clause and failed to purchase the unit. The matter ended up in Court.
The Judge found the Buyer guilty of contractual negligence, that is failing to carry out his side of the contract with reasonable care, and awarded CAD $68,000 to the Seller for losses suffered.
Here is the point. The question at law, as described by the Judge, is whether the Buyer satisfied his contractual obligation to undertake his best effort to obtain financing, i.e.: due diligence. If, in fact, the Buyer had used his best effort to obtain financing but was unsuccessful, the Court opinated, the Buyer could then in fact excuse himself from completing the sale by relying on the non-removal of the financing condition. However in his reasoning the Judge found that by applying for an unobtainable mortgage the Buyer did not fullfil his contractual due diligence, since the Buyer 'knew or ought to have known' that he could not possibly obtain a CAD $250,000 loan. The Court further concluded that the phrase "This clause is for the sole benefit of the Buyer" commonly inserted in real estate contracts in British Columbia did not release the Buyer from the requirement that he use his best efforts to 'diligently fullfil' his side of contractual obligations.
I see often more during the course of my practice that many Buyers - especially the young - think that the subject to financing clause (or any other subject clause for that matter) is a free ticket to walk away from a contract. Not so ! And this recent case re-affirms the fact that it is not so. A contract signifies the common intention of the parties to be legally bound by their respective obligations, with each party relying on the promises and statements made by the other party. Implied in this is the assumption that each party will deal with reasonable care in the carrying out of his side of the bargain.
So, therefore, if you are a Buyer who thinks he can walk away from a Contract of Purchase and Sale merely by not removing a condition precedent, take my multi-annual professional advise and do yourself a favor: do not put in the offer.
Luigi Frascati

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