Navigating Buyer Default: A Builder’s Guide to Remedies and Recovery

Moving from a broken contract to a financial remedy requires a precise and well-documented strategy. This article details how builders can establish repudiation and entitlement to damages and deposits, while also preparing for impending statutory cooling-off periods that will significantly alter the risk landscape for new home sales. Recent court decisions have provided guidance, while the impending Homeowner Protection Act, 2024 creates a new exception for builders to be aware of.

Establishing the Buyer’s Breach and Termination Rights

To recoup losses, a builder must first establish the purchaser’s breach of the APS. It is well-established that a breach of an APS includes a purchaser’s failure or inability to pay the full purchase price or complete the transaction on the scheduled closing date, which constitutes a fundamental breach of the APS.

Under these circumstances, the builder has a choice: either insist on performance of the contract or accept the breach and terminate the APS immediately. Upon termination, the builder may then re-list and resell the property, while the original purchaser remains liable for the breach.

Courts have routinely found that disputes arising from purchaser defaults are appropriately resolved by way of summary judgment, an expedited procedural tool designed to dispose of clear-cut claims without the time and expense of a full trial.

Calculating Damages and the Duty to Mitigate

Once the APS is terminated, the builder’s focus must shift to recovery. Courts in Ontario have consistently held that the proper measure of damages in a failed new home transaction is the difference between the original price and the resale price, along with consequential loss items.

Builders are subject to a duty to mitigate their losses arising from the purchaser’s default. This includes taking reasonable and timely steps to resell the property at the best available price to an arm’s length purchaser. Notably, it is the defaulting purchaser who bears the onus of proving that the builder failed to take reasonable steps to mitigate its losses and that mitigation was, in fact, possible.

There is no obligation on the builder to accept revised terms or a lower price proposed by the defaulting purchaser. Doing so would undermine the sanctity of the initial bargain and the builder’s right to enforce it.

In addition to the resale shortfall, builders may also be entitled to consequential damages. These include carrying costs incurred between the failed closing date and the date the property is ultimately resold, such as property taxes, insurance, utilities, and mortgage interest on the inventory property. These amounts are added to the resale shortfall to determine the builder’s total damages, making record-keeping critical to any recovery effort.

Forfeiture of Deposits and the Rule Against Double Recovery

A crucial issue following a purchaser default is the treatment of the deposit. The Court has held that a deposit stands as security for the purchaser’s performance of the contract and is forfeited upon breach. As noted in several decisions, this compensates the builder for the lost opportunity associated with taking the property off the market after an executed APS, as well as the loss of bargaining power that results from having revealed the price at which they were willing to sell.

However, where a builder sues the defaulting purchaser for a resale shortfall, the function of the deposit necessarily shifts. The law generally prohibits double recovery, therefore the purchaser’s deposit is most often applied as a credit against the builder’s claim for damages.

If the builder’s total damages, including the resale shortfall and carrying costs, exceed the deposit amount, the builder is entitled to retain the deposit and sue the purchaser for the remainder. If the deposit exceeds the total damages, the builder may retain only the amount necessary to fully compensate its loss.

New Regulatory Hurdles: Cooling-Off Periods and Statutory Rescission

While the general rule maintains that a purchaser cannot unilaterally terminate a binding APS without consequence, builders will soon have to navigate a significant statutory exception.

Effective January 1, 2027, the Homeowner Protection Act, 2024 introduces substantive amendments to the New Home Construction Licensing Act, 2017 (the Act), including a mandatory cooling-off period for new freehold homes and other prescribed properties. Under this regime, builders must deliver “prescribed disclosure information” to purchasers, and the APS is not binding until that information has been provided. At present, the scope of the required “prescribed information” has not yet been defined by regulation.

Once the disclosure requirements are met, a purchaser will have a statutory right to rescind the agreement within 10 days of the latest of the following events: (1) the purchaser receives the prescribed information, (2) the builder complies with to-be-prescribed requirements regarding this information, or (3) the purchaser receives a fully-executed copy of the agreement.

If a purchaser rescinds during this cooling-off period, the builder must promptly refund all amounts received, including the deposit, without any penalty or charge, along with prescribed interest on those funds. This is a statutory right of rescission and does not constitute a breach of contract. 

Conclusion

Purchaser defaults present a significant disruption for new home builders. However, recent decisions remind us that the law provides a robust mechanism for recovery. By clearly documenting termination decisions, reselling the property through an arm's length transaction to mitigate losses, and meticulously tracking carrying costs, builders can effectively protect their financial position. As statutory cooling-off periods approach, proactive attention to disclosure practices and contact administration will be equally critical to managing risk in future transactions.

HOW WE CAN HELP

RAR Litigation represents builders and developers in disputes arising from purchaser defaults and failed real estate transactions.

Contact us for strategic advice, risk assessment, and litigation representation.