When a real estate deal falls through, you should weigh whether litigation is worth it

Mar 4, 2023 | 2023 Toronto Star Property Law Columns

By Bob Aaron
Toronto Star contributing columnist

Why resort to the courts when a transaction involving a sale of a house falls through? This case shows it can be unnecessarily costly, says Bob Aaron.

Is it worth taking someone to court over a failed house purchase, assuming there appear to be grounds to do so?

A decision of the Superior Court of Justice last year is a classic example of the high cost of justice in Ontario and why parties to real estate litigation need to be more realistic in their expectations.

In February, 2020, Yi-Hang Chan and Chiao-Wei Hsiao signed an agreement to buy 16 Bryant Ave. in Toronto from Shan Mangal for $1,010,000. They paid a deposit of $50,500 to the broker.

Prior to closing, Chan and Hsiao discovered that the City of Toronto had four open building permit files and one active inspection file in its records for the property. Their lawyer sent what is known as a requisition letter to Mangal’s lawyer demanding that the city’s files be closed.

The law is that the seller of a property is required to provide clear title to a buyer. Open building permit files are fatal title defects, which entitle a buyer to refuse to close unless a title insurance company will provide coverage for the issues.

On the day of closing in March, 2020, the city’s files were still open and the buyer’s title insurer would not insure, over the building permit problem.

The buyers were ready to close the transaction, but, understandably, refused to do so with the outstanding permits and two other liens still in place. Chan and Hsiao demanded a return of their deposit, but Mangal refused to agree, claiming he acted in good faith and that the deposit should be forfeited.

The buyers sued the seller for return of the deposit and the case came to trial before Justice Perell last March.

In his decision, the judge called this case “a routine abortive real estate transaction.” As the buyers were entitled to good title without the open permits, the judge ruled that the deposit be returned.

In July, the parties were back in court again arguing about court costs, and here is where it gets especially interesting.

The buyers wanted the judge to award them their entire legal costs of $70,060.32, or partial costs of $61,581.70. Even though he lost the case, Mangal asked for his entire legal bill of $45,267.23.

Justice Perell ruled that the seller had to pay “fair and reasonable” costs of $25,000 on what the courts call a “partial indemnity” basis.
When the smoke clears, and assuming the winning buyers recover their costs from the seller, the buyers will receive back their deposit of $50,000, plus costs of $25,000, minus their lawyer’s bill of $70,000 (rounded), or almost nothing, unless their lawyer reduces her bill.
The seller, on the other hand, forfeits the deposit, and has to pay his lawyer $45,000 plus the buyer’s costs of $25,000, for a total of $70,000.

I have difficulty understanding why Mangal felt he could keep the deposit when he was clearly unable to provide clear title on closing.
This is a perfect example of a case where the seller was in default and should have voluntarily agreed to return the deposit.

The case should never have gone to trial and the parties could have been more realistic in their settlement negotiations.

Trial decision:  Chan v. Mangal, 2022 ONSC 2068 (CanLII), <https://canlii.ca/t/jnqwz>
Costs decision Chan v. Mangal, 2022 ONSC 4191 (CanLII), <https://canlii.ca/t/jqzld>


Contact Bob Aaron

Bob Aaron is a Toronto real estate lawyer and frequent speaker to groups of home buyers and real estate agents.
He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818.

Aaron & Aaron specialize in Real Estate Law, specifically Sale of Rental, Condominium, Residential, Rural Recreation, Offer to Lease, Commercial, and New Construction

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