Breach of contract: What are the implications?

[Passthedonuts]

Hi folks, newbie investor here.

My wife and I made a crucial mistake in April 2008. We purchased a pre-sale townhouse in Surrey, BC that is due to complete on May 1, 2009.

When we purchased the market was still strong, and we expected no problems obtaining a mortgage to complete on the purchase. Our intention was to rent out our existing condo, move into the new home and start building our portfolio.

Long story short, everyone knows what happened in the market since then. The bank has appraised our property at $387,000, when we paid $446,000 for it. They are asking for the difference before they will issue a mortgage. This is not possible. With the market correction, we no longer have enough equity for a LOC or not nearly enough resources to come up with the required downpayment to complete the purchase. Family assistance is not an option either.

To compound the issue, I lost my job and my wife is starting EI for maternity leave in one week. The baby was a surprise as well! Our financial situation is substantially different when we purchased, much of which was unplanned.

Basically we are unable to complete and that`s the bottom line. I`ve consulted a lawyer who is apparently a shark at finding flaws in pre-sale contracts and disclosure statements, and he is reviewing our case next week. I`m hoping for a miracle.

My question is, if our lawyer does not find a way out for us, and we do not complete, what are the actual implications of this and the likelyhood they would be carried out? Obviously the contract says that the developer could sue for lost sale price, holding costs, legal fees, specific performance etc. I expect at a minimum we will lose our $22,500 deposit.

The lawyers I`ve spoken to about this have given me typical lawyer answers of course "Here is what could happen...here is what the contract says etc.", but I was looking for some more practical advice for anyone who has experience on the matter.

I`m not here looking for sympathy, I realize we gambled and lost. Our plan is to learn from this mistake, move forward and hopefully wipe our hands fairly clean from this transaction.

What is the likelyhood a developer will actually follow through with a lawsuit on this matter? We are in our 20`s, just starting out and our net worth has been wiped out in this transaction, so will the developer pursue it knowing it`s like getting blood from a stone?

If I`m in front of a judge, will some consideration be given to our situation, or will a judgement be determined on whether or not an actual breach of contract took place, not the situation of the purchaser?

Any advice is appreciated. Thanks.

 

[mcgregok]

QUOTE (Passthedonuts @ Apr 17 2009, 02:47 PM) Hi folks, newbie investor here.

My wife and I made a crucial mistake in April 2008. We purchased a pre-sale townhouse in Surrey, BC that is due to complete on May 1, 2009.

When we purchased the market was still strong, and we expected no problems obtaining a mortgage to complete on the purchase. Our intention was to rent out our existing condo, move into the new home and start building our portfolio.

Long story short, everyone knows what happened in the market since then. The bank has appraised our property at $387,000, when we paid $446,000 for it. They are asking for the difference before they will issue a mortgage. This is not possible. With the market correction, we no longer have enough equity for a LOC or not nearly enough resources to come up with the required downpayment to complete the purchase. Family assistance is not an option either.

To compound the issue, I lost my job and my wife is starting EI for maternity leave in one week. The baby was a surprise as well! Our financial situation is substantially different when we purchased, much of which was unplanned.

Basically we are unable to complete and that`s the bottom line. I`ve consulted a lawyer who is apparently a shark at finding flaws in pre-sale contracts and disclosure statements, and he is reviewing our case next week. I`m hoping for a miracle.

My question is, if our lawyer does not find a way out for us, and we do not complete, what are the actual implications of this and the likelyhood they would be carried out? Obviously the contract says that the developer could sue for lost sale price, holding costs, legal fees, specific performance etc. I expect at a minimum we will lose our $22,500 deposit.

The lawyers I`ve spoken to about this have given me typical lawyer answers of course "Here is what could happen...here is what the contract says etc.", but I was looking for some more practical advice for anyone who has experience on the matter.

I`m not here looking for sympathy, I realize we gambled and lost. Our plan is to learn from this mistake, move forward and hopefully wipe our hands fairly clean from this transaction.

What is the likelyhood a developer will actually follow through with a lawsuit on this matter? We are in our 20`s, just starting out and our net worth has been wiped out in this transaction, so will the developer pursue it knowing it`s like getting blood from a stone?

If I`m in front of a judge, will some consideration be given to our situation, or will a judgement be determined on whether or not an actual breach of contract took place, not the situation of the purchaser?

Any advice is appreciated. Thanks.


Talk to the develpor to see what they have to say. They may have a plan in place to handle these mortgage difficulities. Your probably not the only one in the situation.

 

[Thomas Beyer]

QUOTE (mcgregok @ Apr 17 2009, 05:37 PM) Talk to the develpor to see what they have to say. They may have a plan in place to handle these mortgage difficulities. Your probably not the only one in the situation.
I`d echo that. talk to them first. Tell them that you will not close.

If the developer is smart, he will keep the deposit and re-sells.

if he is desperate/a shark he will sue for breach-of-contract, which will take years to win, but he may do that .. and he may win and you will lose deposit and difference in price and pay for legal fees !!

What does the contract say about this situation ?

2nd option: buy a smaller unit perhaps ??

 

[Passthedonuts]

We advised the developer back in January and explained our situation that this was a likely possibility. They responded with a letter from their lawyer advising they are willing, ready and able to complete as per the contract and will seek legal remedies if we do not complete. He then quoted the contract saying they will sue for specific performance: including, but not limited too: loss in sale price, legal fees, real estate commissions, holding costs etc.

My other concern is, we are working to rebuild our financial situation and accumulate more assets over the next couple of years. If this event drags out for a couple of years, I want to make sure assets accumulated after the breach took place are protected from a court judgment in the event that we lose.

 

[Thomas Beyer]

QUOTE (Passthedonuts @ Apr 17 2009, 07:37 PM) We advised the developer back in January and explained our situation that this was a likely possibility. They responded with a letter from their lawyer advising they are willing, ready and able to complete as per the contract and will seek legal remedies if we do not complete. He then quoted the contract saying they will sue for specific performance: including, but not limited too: loss in sale price, legal fees, real estate commissions, holding costs etc.

Then assume they want you to close .. keep in mind though that just because you get sued it does not mean you lose or owe money or that they win .. and it takes YEARS .. likely 2+ years ..

buying is an option to consider .. as prices will recover eventually ..

QUOTE (Passthedonuts @ Apr 17 2009, 07:37 PM) My other concern is, we are working to rebuild our financial situation and accumulate more assets over the next couple of years. If this event drags out for a couple of years, I want to make sure assets accumulated after the breach took place are protected from a court judgment in the event that we lose.
Who signed the contract ? Person A ?

Then person B should own the other assets.

 

[GarthChapman]

Is there not a financing condition in this purchase contract? If there is, then see if you can get a mortgage. You might not qualify. If you cannot then you are off the hook. You would normally need to be refused in writing by 3 lenders.

 

[mcgregok]

Best to talk to a lawyer. Here is a quote I picked up.
Impossibility of performance can terminate a contract if something unforeseen prevents the performance of the contract. For example, you contract with a famous painter to do your portrait and the famous painter dies. The obligation to paint your portrait cannot be completed. The contract to paint your portrait is terminated by impossibility of performance. So, you lost your job due to a bad economy no one forsaw.

Again , run it my your lawyer

 

[Dan_Eisenhauer]

The developers in the Lower Mainland are suing purchasers who are electing not to close, regardless of the circumstances of the buyer.
The developer has several options... from personal experience. They can sue for breach of contract and for "specific performance", meaning you will be ordered by the courts to complete the transaction. If you are unable to complete for the inability to obtain financing, then the developer may opt to settle out of court. Assuming this is the road you go down, you can probably count on paying the difference between the price you agreed to and the current market price, PLUS the developer`s cost of carrying a vacant unit for a period of time, PLUS additional marketing costs, PLUS a portion of the developer`s legal cost.

The developer can also sue for damages. They would add up ALL their costs of your failure to complete the transaction and sue for that amount. It would look very much like the figure that would be presented to you for an out of court settlement.

How do I know? This is one of my life`s lessons... apparently not learned very well, because I have another potential lawsuit in my future. I will know by the end of this month whether or not I will have a lawsuit on my hands. It is not a pleasant situation to be in, and you have my complete understanding.

 

[wealthyboomer]

Cite an Act of God — “unlikely events,” clause in the contract to cancel the contract & justify not paying. (if you have such or similar clause)

Point to a “force majeure” clause in the lending agreement that allows the borrower to delay completion of the building if construction is hampered by things like riots, floods or strikes. That clause has a catch-all section covering “any other event or circumstance not within the reasonable control of the borrower,”

“Would you consider the biggest depression we have had in this country since 1929 to be such an event? “A depression is not within the control of the borrower.”

Donald Trump is doing the above, why not do the same?

 

[Dan_Eisenhauer]

"Frustration" is the legal term for "impossibility of performance". A contract is frustrated when an unexpected event occurs that prevents the completion of the contract.

I assume you have had conversations with your lawyer around this matter. Their advice, knowing the contract and your situation, is much more salient than a bunch of us pronouncing on your specific legal matters. I am guessing here that you have received an opinion from them that you don`t like, and that you are seeking a second opinion from those of us who do not know your specifics.

Trust your lawyers. If they are telling you you are hooped, to use Don Campbell`s latest favourite expression, you are probably hooped. The good news is that you are young and can start over. My first such mistake happened when I was in my 20s. I recovered and moved on.

And, you are not the only REIN member to be caught in this predicament, if that gives you any solace. I have had conversations with one other member on this same subject. I also know of one more person who has stopped making payments on a pre-sale in a foreign country.

 

[navaz]

Have the lawyer try to negotiate a settlement too! They are able to do it because there will be no winners in a lawsuit.