The Agreement of Purchase and Sale With a Financing Condition That Never Firmly Failed
Your clients signed an Agreement of Purchase and Sale for a resale house in Ottawa at $865,000, with a $40,000 deposit held in trust by the listing brokerage. The APS contained a financing condition 'satisfactory to the Buyer in the Buyer's sole discretion,' waivable by written notice, with a firm date of five business days after acceptance. On day four, the buyers' lender verbally told them the file was 'declined pending further review.' The buyers' agent sent an email on day five stating the buyers 'are not waiving' the condition. The sellers treated the deal as terminated and relisted. On day nine, the lender approved financing. The buyers now demand completion; the sellers have a $790,000 backup offer and claim the $40,000 deposit plus damages. The APS also contains a standard 'time is of the essence' clause and a clause permitting the sellers to retain the deposit 'as liquidated damages' on buyer default.
1. Was the financing condition validly triggered, and what is the effect of a condition framed as being in the buyer's 'sole discretion'?
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A condition precedent in an APS must be satisfied or waived by the stated date; if it is not, the agreement comes to an end and the deposit is returned, absent a contrary term. But the scope of the buyer's discretion matters enormously.
Where a condition is expressed as satisfaction 'in the buyer's sole discretion,' courts have generally treated the buyer's decision as genuinely subjective - the buyer need only act honestly and in good faith, not on objective reasonableness. That is a double-edged sword. It protects a buyer who honestly is not satisfied, but it does not permit a buyer to invoke the condition capriciously or in bad faith, and it does not allow a buyer to keep the deal alive while shopping.
The email on day five saying the buyers 'are not waiving' is not the same as a notice that the condition has failed. The condition required written notice of waiver; its absence by the firm date means the condition was not waived, and the agreement terminated by operation of the condition. The buyers' later financing approval on day nine is irrelevant: the condition is assessed as at the firm date, not retroactively.
Advise the sellers that termination was likely effective, but warn that a court may scrutinize whether the buyers' conduct was in good faith - particularly if the 'declined pending review' was a pretext. The evidentiary record (lender emails, the agent's file) is decisive.
2. Can the sellers retain the $40,000 as liquidated damages? Analyse the clause and the deposit's treatment.
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A deposit is not automatically forfeited. The character of a deposit depends on whether it is a true deposit (an earnest of performance, forfeitable on the purchaser's default) or a part payment. A clause calling the deposit 'liquidated damages' is not conclusive; a court will ask whether the sum is a genuine pre-estimate of loss or a penalty.
Here the deposit is 4.6% of the price. That is within a range courts have accepted as a true deposit, but the label 'liquidated damages' invites penalty analysis: if the sellers' actual loss is readily measurable (the $75,000 gap to the backup offer, plus carrying costs), a court may treat the clause as an unenforceable penalty and require the sellers to prove their loss.
The stronger position for the sellers is to plead the deposit as a true deposit forfeitable on default, with the liquidated damages clause as an alternative. If the buyers' termination was valid, there is no default and the deposit must be returned in full.
Advise the sellers: (1) do not release the deposit from trust without either the buyers' written consent or a court order, because the brokerage holds it as stakeholder and may be exposed to a interpleader; (2) quantify the $75,000 differential and carrying costs now; (3) expect the buyers to argue the condition was satisfied by the day-nine approval, which fails on timing. Settlement leverage is the gap between $40,000 and the $75,000 actual loss.