Assignment of Residential Real Estate Transactions – Part 1 of 3 (Series)

By Nathan Serratore of Merovitz Potechin LLP on Monday June 26, 2023.

Ontario’s housing market has fluctuated wildly over the past 18 months. Availability of low residential mortgage rates during the early days of the COVID pandemic fueled record-setting home sales and frequent bidding wars. As mortgage rates have risen, vendors and purchasers are now faced with new challenges in completing transactions.

Occasionally, a prospective purchaser may enter into an Agreement of Purchase and Sale (an “APS”) and, prior to the closing date, decide that they can not complete the transaction. This may happen for a variety of reasons – perhaps the purchaser found another home they prefer, or more commonly, the purchaser cannot obtain the financing required to complete the sale.

Once an APS is signed and all conditions are waived, it forms a binding contract obligating the parties to complete the transaction. If a purchaser fails to complete the deal, they may be exposed to significant consequences – In most cases their deposit will be forfeited, and they may be held responsible for the vendor’s losses. If, for example, the transaction fails and the vendor sells the property some time later on at a lower purchase price, the original purchaser could be held liable to pay the difference between the original purchase price set in the APS and the amount the property eventually sold for (along with the vendor’s expenses including costs to re-list the property, advertise the sale, legal fees, and any other financial burdens arising out of the failed transaction).

If a purchaser cannot complete the sale and the vendor does not agree to abandon the deal, the purchaser may look to other options to avoid the consequences of failing to close. One of those options could be to assign their rights and interests in the APS to another purchaser. The intention of the purchaser would be to replace themselves (the “Assignor”) with another party (the “Assignee”) so that the Assignee will “step into their shoes” and take their place as purchaser. The choice to assign an APS is becoming more common in light of rising residential mortgage rates in Ontario.

In this three-part series, we will explore some key considerations when it comes to a purchaser’s assignment of their interest in an APS:

In part 1 below, we will discuss the circumstances in which assignment is available to a purchaser.

In part 2, we will explore instances when an assignor may remain liable for consequences connected to the transaction, despite going through with assignment. We will also discuss some options that assignors may take to mitigate that exposure.

In part 3, we will examine some of the various methods by which assignment may be performed, and the pros and cons that come along with each of those methods.

Part 1: When is Assignment available?

Assignment is not a universal get-out-of-jail-free card that a purchaser can rely on at any time to circumvent their obligations in the APS, even if they can find a willing assignee. Whether or not assignment is available will lie in the terms of the APS itself. At the outset of entering into a transaction, savvy purchasers and vendors will turn their minds to whether they a) choose to include terms permitting assignment, or b) require mutual consent assignment to be allowed.

If the APS is silent as to the availability of assignment, or if it explicitly permits assignment, it may be the case that the purchaser can simply go out, find a co-purchaser or assignee, and proceed to assign their interest in the APS elsewhere. If this is the case, the purchaser can complete a valid assignment without the knowledge, participation or consent of the vendor. The Vendor would then be required to complete the sale to the new purchaser.

This is generally the case in transactions of re-sale residential properties where the standard-form APS provided by the Ontario Real Estate Association (“OREA”) is used. However, purchasers should note that this is only a rule of thumb and the terms of the OREA APS may be amended or added onto, which may affect the availability of assignment.

Conversely, in the context of new home sales it is quite common (though not universal) for developers to include strict language requiring the vendor’s consent for a purchaser to assign their interests in the transaction. If consent is a pre-requisite in the APS, and your vendor does not agree to swap you out of the transaction, then assignment may not be an option for you.

Regardless of whether the transaction involves a new or re-sale residential property, parties must look to the terms of their agreement to determine whether the option of assignment is available.

Key Takeaways

• Prior to selling your property and signing an APS, consider whether you want to include terms requiring consent for the opposing party to assign their interests in the deal;

• Failing to complete a transaction and breaching an APS can come with severe consequences to the defaulting party. Depending on the circumstances, assigning the APS may be a tool to reduce those consequences or avoid them altogether;

• Without terms to the contrary, assignment of one’s interest in an APS can usually be completed without notice or consent of the opposing party. Speak with a real estate lawyer before assigning your deal;

• If you are considering entering into an APS (or have already done so) and are curious about assignment, reach out to a real estate lawyer to discuss your options.

Be sure to check back in for part two to this series in the near future.