The potential of a failed real estate deal can result in last minute, aggressive legal action. Unfortunately, if lawyers haven’t been part of the transaction process prior to those last hours before closing, it’s a matter of mopping up and assessing the damages as best they can.
Lawyers are sometimes left out of the transaction process until a binding contract has been executed. Often, it’s a case of vendor or purchaser self-confidence resulting from having consulted real estate professionals such as inspectors, mortgage brokers and realtors instead. For some, keeping the lawyers out of the transaction negotiations for as long as possible may seem prudent from a cost standpoint.
Real estate transactions can fall apart even if conditions have been waived or fulfilled. Perhaps the vendor has been seduced by an improved offer from an alternate purchaser. Maybe the purchaser’s financing has collapsed at the last moment, or a sudden downturn in market conditions has now made the subject property too expensive. Conditions and agreements are usually outlined in the Agreement of Purchase and Sale (APS) in anticipation of these and other potential deal breakers.
No matter the reason, however, when trouble arises in the hours before closing, fingers are pointed in every direction. Demands for the return of deposits and threats of court action by both sides often follow. Lawyers then become mandatory in order to resolve a conflict that can quickly become complicated, nasty and costly.
The importance of understanding lawyer-as-agent authority
It’s important to understand where client-lawyer authorities lie during this period of sensitive negotiations. Otherwise, potential conflict can develop between the lawyer and the client, particularly when the lawyer is brought in suddenly to settle what threatens to be a failed closing. The implications are important.
Jeremy West of law firm Watson Goepel LLP notes a recent case in British Columbia where several pre-conditions had been contracted between the vendor and the purchaser at the time of the Agreement of Purchase and Sale (APS). However, the purchaser baulked the day before closing and demanded a return of the deposit. Conflicts with the vendor were cited concerning certain contracted conditions that came to a head after a city building inspector’s report was issued.
Only then were lawyers brought in to deal with the situation. Over the course of those last few hours before closing, the lawyers for each party ultimately agreed to a mutual release from the sales contract and a return of the purchaser’s deposit. However, the vendor objected to the actions of their lawyer and took the matter to court, maintaining the APS should be upheld. The vendor’s action failed.
It’s not the issues. It’s the authority to act, says the court
As West explains, the specific issues related to the conflict between vendor and purchaser were found by the court to be irrelevant. “There was a valid and enforceable contract until one day before the completion date,” he says. What mattered, continued West, was that subsequent correspondence during that last day “showed a clear agreement between the solicitors that the contract was at an end and the deposit was to be returned.”
The lesson here is clearly stated in the court ruling, as summarized by West; “Unless a solicitor clearly communicates to the contrary to those with whom he or she is negotiating, a solicitor is the agent of the client and may bind their client to an agreement.”
Reading between the lines of this example, one might also agree with West’s overall proposition that risks arise when lawyers are left out of early APS negotiations.
“Consulting a lawyer experienced in real property transactions at an early stage, and prior to the completion date, can often mean the difference between an uncertain, protracted and costly court case and a swift and efficient resolution.”
John Bleasby is a Coldwater, Ont. based freelance writer. Send comments and Legal Notes column ideas to firstname.lastname@example.org.