Can a buyer back out of an accepted offer in Canada?

Buying residential property may be one of the most important decisions anyone has to make. Finding the perfect home, arranging all the necessary finances, and negotiating with the seller work towards one goal: having the seller accept the offer.  

However, one may ask: “Can a buyer back out of an accepted offer in Canada?” This article will discuss the possible grounds to legally cancel an offer, and the consequences that may happen if it’s done illegally.

This article can be used by lawyers to educate clients on the consequences of backing out of an accepted offer from the viewpoint of Canadian laws.

Can a buyer back out of an accepted offer in Canada?

Yes, but there are legal implications when backing out of an accepted offer or real estate deal.

Not only do these legal implications affect the buyer but these will also give the seller legal options that they can use against the buyer.

If it’s allowed by the law, the buyer can back out of an accepted offer in Canada. If it violates the offer or contract, the buyer is bound by it and must stay true to the contract.

Applicable law for consequences when backing out

Here are some of the Canadian laws that apply if a buyer wants to back out of an accepted offer:

• Canada’s common law related to real estate and contracts of sale
• provincial or territorial laws on property, mortgages, and buying of residential houses

Knowing these laws on their own – either as a buyer or as a seller – may be taxing. As such, it’s important to seek advice from real estate lawyers and brokers. Every case would differ from each other, depending on the provincial laws and regulations that apply.

Read next on Mortgage Professional: Why do you need a real estate lawyer?

“Accepted offer”

Buyers must initially understand when an offer is considered accepted – making it legally binding – and how this relates to the lawfulness of backing out of a real estate deal.

A buyer’s offer to purchase is officially accepted by the seller once they have signed it within the specified date in the offer. Verbal promises to purchase are not valid.

It’s the act of signing the offer that makes it legally binding. This will also prompt the parties to move forward in the process until the closing date. This may include:

• paying earnest money or deposit (buyer)
• applying for financing to help pay the seller (buyer)
• arranging for home inspection and appraisal (buyer)
• fulfilling any other the conditions specified in the offer, agreement, or contract (both parties)

Between the acceptance of the offer and the closing date, backing out will be difficult unless it is allowed by law or by the offer itself.

What are the grounds for buyers to back out of an accepted offer in Canada?

Canadian laws that provide for specific grounds will legally allow the buyer to do so.

It is still important that buyers consult with their lawyers whether these grounds apply to them or not. This will also depend on the terms of the accepted offer and the specific provincial laws that may govern them.

If stated in the contract

When the accepted offer contains a provision that gives the buyer the right to cancel, the buyer can back out of an accepted offer. This provision may also be found in its attached documents, including the disclosure statement.

Usually, the period for the right to rescind may range from 3 to 10 days, or up to a month, depending on the contract.

In this case, the buyer would not be liable, since the buyer is only exercising the right provided to them as stated in the contract or offer. It can be argued that the seller allowed this provision when they accepted the offer without any demand or qualifications.

It also means that offers, whether in a prescribed form or not, should be carefully worded, such as including the right to rescission of buyers.

If subject conditions or clauses fail

An offer will typically include “subject conditions” or “subject clauses”, which will lay down all the tasks that one or both parties must do before the closing date.

These conditions may pertain to any of the following matters:

• inspections and reports
• financing or mortgages
• sale of buyer’s existing home

When these subject conditions or subject clauses are not met, any of the parties may rescind or cancel the offer. However, the procedure in cancelling the offer, as stated in the same document, must also be followed.

If there’s inaction or rejection by the seller

There are four actions that a seller can make when an offer is given to them by the buyer:

• accept the offer
• reject the offer
• ignore the offer
• make a counteroffer

When a buyer sends their offer to purchase a property, and the seller simply ignores the offer or does not act on it, that will allow the buyer to “back out” of the offer. Although, technically speaking, there’s no act of backing out yet since the seller hasn’t accepted the offer.

Here, the act of the seller can be considered a rejection. As such, the buyer is released from any liability arising out of the offer to purchase.

Similarly, the seller may reject the buyer’s offer and propose a counteroffer. When this happens, the buyer can back out of the offer if they reject the seller’s counteroffer.

These circumstances are in favor of the buyer, especially when there’s no deposit or earnest money given.

If no agreement is made, the buyer can walk away from the transaction. However, this will depend on the contract or agreement that both parties have signed, which will be legally binding between them.

If allowed by provincial/territorial laws

Buyers must also be familiar with provincial or territorial laws on homebuying or real estate purchases before they proceed to making an offer.

In some provinces, a buyer can back out of an accepted offer if allowed by their provincial laws, but only within a specified period.

Cooling-off Period – Ontario

In Ontario, if the residential property involved is a newly built condominium, buyers can back out of purchase agreements within the “cooling off period”. Ontarians are given this right under the Condominium Act.

Under this law, a buyer has a 10-day cooling-off period, where they can rescind their Agreement of Purchase and Sale. This period will start to run from the day that the buyer receives the same Agreement, Disclosure Statement, and Condo Guide from the seller.

A written notice or cancellation letter is also required if the buyer exercises this right against the seller.

Right of Rescission – British Columbia

In British Columbia, its Property Law Act (PLA) and Home Buyer Rescission Regulation (HBRR) provide for a “Home Buyer Rescission Period” (HBRP).

The HBRP provides the right of rescission to a buyer of a residential real property. This allows buyers to back out of an accepted offer by rescinding the contract, but only up to 3 days after the offer is accepted. This right cannot be waived.

There are certain exceptions to this right of rescission under the HBRP:

• if title to the property has been transferred from the seller to the buyer
• if the residential real property is located on a leased land
• if the purchase involves a leasehold interest in a residential real property
• if the residential property is sold at an auction, or under a court order, or under the supervision of the court
• if the purchase involves pre-construction sales of multi-unit development properties, which are governed by the right of rescission under BC’s Real Estate Development Marketing Act

The HBRP is a recent amendment to the Property Law Act. The amendment came into force on January 3, 2023.

Watch this video to know more about this right to rescission as provided by BC’s HBRP:

Misrepresentations

Misrepresentations are false statements or omitted facts that may affect a buyer’s decision to proceed with a deal or not.

Misrepresentation is one of the few grounds for withdrawing from a home purchase agreement. To be used against the seller, the nature of misrepresentation must be that it will deprive the buyer substantially of what they bargained for.

However, there may be instances when misrepresentations could still prevent the buyer from backing out of an accepted offer.

If the offer or closing contract contains holdback provisions, this will remedy any future damage due to false or misleading representations of the seller. But this does not automatically allow the buyer to back out of an accepted in Canada.

A failure or misrepresentation only allows a way out of the transaction if it is considered fundamental to the transaction or is a significant part of the property.

Warranties

Somehow similar with misrepresentations, warranties are commitments or promises by the seller on the quality or aspect of the property. These also include statements that assure the buyer that such property is free from any defects.

When a material and significant warranty has been violated by the seller, this may give the buyer a reason to back out of their accepted offer.

Not all warranty-related problems are grounds for backing out of an accepted offer, since these may be solved through negotiations, especially regarding the selling price.

Buyers should consult with their lawyer to see whether the warranties and misrepresentations would allow them to terminate their contract. This is important since problems with warranties and misrepresentations may occur only after the deal has been closed.

For more details on whether a buyer can back out of an accepted offer in Canada, watch this video:

Looking for lawyers in Ontario? Check out our special report on the Top 10 Ontario regional firms of 2023 and read about how these law firms made it to this list.

What are the consequences when backing out of an accepted offer in Canada?

Even if a buyer can back out of an accepted offer, they must prepare themselves for the legal consequences arising from such an act.

Once an offer has been accepted by both parties and the purchase agreement has already been signed, it becomes a legally binding contract which must be followed.

Any violations of this offer or contract will open the buyer to penalties, including those mentioned in the contract itself or as imposed by the law.

Loss of earnest money

The buyer may lose their earnest money or deposit money that was given in line with their offer.

Earnest money, also called “good faith deposit”, is the amount that the buyer makes along with the offer. This is different from a downpayment.

When earnest money is given, this is like saying that the buyer will proceed with the purchase after fulfilling other conditions stated in the agreement.

While sellers may return the earnest money if they reject the offer, it’s not the same thing with buyers. If the buyer backs out after the offer was accepted by the seller, the earnest money is forfeited.

Depending on the contract or upon the order of the court, the buyer may be entitled to the return of the earnest money. However, this is a rare exception.

Filing of case against the buyer

One consequence of backing out of an accepted offer in Canada is that the seller may file a civil case against the buyer. There are two claims that a seller may make in this civil case: specific performance or damages.

Although this is rarely done, a seller may compel the buyer to complete the transaction when the seller asks for specific performance.

The seller can also ask the court for damages from the buyer due to the failed transaction. Damages may refer to the seller’s actual loss of probable income, legal fees, marketing costs, among others.

Contractual obligations

Lastly, a seller can now impose the penalties and other consequences mentioned in the offer or contract when a buyer backs out of an accepted offer without any legal reasons.

Aside from losing the earnest money and the possible filing of a suit against the buyer, other obligations of buyers, as stated in the contract, may include payment of the seller’s numerous costs.

Thinking of backing out of an accepted offer?

While a buyer can back out of an accepted offer in Canada, this must be done within the bounds of the offer and the law.

For both buyer and seller, it’s important to know when a buyer can back out of an accepted offer. One should also refer to the provincial laws that apply, including a strict reading of the offer, contract, or agreement.

When things fail, or even before entering into a transaction, hearing from a legal counsel or real estate lawyer would also be helpful.

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