What happens if the home you agreed to buy goes up in flames before closing?
That was the question before the Ontario Superior Court earlier this year.
Here’s what happened: In May last year, Grant McDonald agreed to buy a century home on a two-acre lot in Tillsonburg, Ont., from the estate of June Lowrie for $775,000.
The parties used the standard form Ontario Real Estate Association (OREA) agreement of purchase and sale. It provided that the property remained at the seller’s risk until closing. If there was “substantial damage,” the buyer had a choice: he could either walk away and get his $25,000 deposit back, or complete the purchase at the contract price and take whatever insurance proceeds were available.
Twenty days after the agreement was signed the property was destroyed by fire. To help the buyer in choosing whether or not to close, the seller provided the buyer with a copy of the fire insurance policy. Just before the extended closing date, the seller’s lawyer received the insurer’s offer: rebuild or take a cash settlement of $749,375.37.
A contractor’s rebuild quote was $973,813.94.
On the closing date, the buyer paid the full purchase price to the lawyer for the Lowrie estate but on the condition that the funds could be released only if the seller guaranteed that the insurance proceeds were enough to rebuild the house. Without that guarantee, he would not close.
The trustees of the Lowrie estate treated the buyer’s demand for a guaranteed payout as a repudiation of the agreement. Their lawyer returned the sale proceeds to the buyer minus the $25,000 deposit.
McDonald then brought an application in Superior Court for a declaration that the seller had breached the agreement. He asked the court for an order requiring the seller to close the original agreement or return the $25,000.
The court agreed with the seller. Relying on a 1986 decision of the Supreme Court of Canada, Justice Kelly Tranquilli said the insurance clause gives the buyer a choice: cancel the deal and get the deposit back, or close and take whatever insurance proceeds were available, not as you wish they would be.
The OREA insurance clause does not let a buyer “wait and see” what the insurer will pay, nor does it force the seller to guarantee any amount.
By wrongly insisting on that guarantee, the buyer tried to rewrite the contract with a variation the seller didn’t have to accept.
Because the buyer wasn’t “ready, willing and able” to close on the original contract terms, the seller could treat the deal as terminated and retain the deposit.
Some takeaways from the case of McDonald v. Lowrie are:
• If a disaster strikes before closing, the buyer can either walk away with the deposit, or accept whatever the insurer will offer. A buyer can’t demand a guaranteed amount.
• Sellers need to provide timely insurance information and a reasonable window for the buyer to decide whether or not to close, but there is no obligation to promise a minimum payout.
• The standard OREA insurance clause doesn’t guarantee replacement of the building or restoration of all the damages, and it doesn’t provide for a reasonable extension of closing.
• The OREA insurance clause protects the buyer from having to close the purchase of a destroyed or damaged house.
• It’s important for insurance policies to have full replacement value coverage.
If I was involved in the case, I would have accepted the insurance company’s offer to rebuild the house.
