What can go wrong on a real estate file at the lawyer's office?

This article was produced in partnership with Diamond & Diamond

Fergal McAlinden of Canadian Mortgage Professional spoke with Sanjay Soni, senior counsel, business development and innovation at Diamond & Diamond, on missteps that can lead to litigation in the real estate process.

When it comes to today’s fast-paced real estate and mortgage market, it goes without saying that mortgage brokers breathe a sigh of relief when a deal finally makes it over the line without a hiccup.

Yet in the worst-case scenario when things don’t go to plan, the process can become embroiled in complications – and even litigation. As Sanjay Soni (pictured), senior counsel, business development and innovation at Diamond & Diamond told Canadian Mortgage Professional, there are several situations brokers should be aware of that can cause a legal headache for their clients.

The most common of these, Soni said, is in the case of files not closing on time – for instance, mortgage instructions not arriving when they’re supposed to. Another example that frequently arises would be where a sale and purchase are scheduled on the same day, meaning that a buyer is selling their current property with too tight a window to be able to pay for the one they’re purchasing.

“If you’re selling to buy, one of the things we always recommend is that you make sure to have a bridge between sale and purchase,” he said. “Give it a couple of days, because if something goes wrong with your sale, then you won’t have the money to buy the new property on the same day.”

Those who are selling their property to purchase a new one should be aware of the risk that the buyer of their current house may have waived financing conditions, but this can still cause issues in the case where the buyer is unable to secure financing prior to the closing date, or the instructions are not sent to the solicitor in a sufficient amount of time prior to the closing date.

“The people that are buying your house may have waived their financing because they thought they could get a mortgage,” Soni explained. “But what happens if they can’t? What happens in that case is that there’s a chain effect when they can’t close on the purchase.

“That in turn means that you can’t close on the one that you’re buying – but the people that you’re buying from don’t care that you couldn’t sell your house. That could potentially end up in a litigation scenario.”

In a situation like that, it’s possible that if the seller loses money because the sale didn’t go through, they could pursue the buyer for whatever the loss may have been – which includes the forfeiture of the buyer’s deposit.

Closing on a deal is further complicated when purchasing from a builder, with the actual date for closing often not arriving until several years down the line. Builders may require a letter from a financial institution stating that the borrowing client would qualify in three years based on their income today – but problems can arrive if that date passes without the buyer being able to close on the mortgage.

“The builder has two options at that point: they can either extend the timeline to secure financing or they can say, ‘You didn’t close – we’re no longer moving forward because you don’t have a mortgage in place,’” Soni said.

Such a scenario can lead to litigation, although the builder has the advantage because they technically do have the right not to close if the buyer is unable to show that they’ve secured a mortgage.

It’s also common for litigation to occur as a small claims matter where there’s an undisclosed fault or defect with the property that the seller had not revealed prior to the purchase – for instance, a fridge or dishwasher that doesn’t work.

“If it turns out that the sellers knew about a major defect and tried to hide it in any way, that could potentially result in litigation – particularly if they signed something stating that they were unaware of any major faults.”

Where tenants are currently living in a property, and refuse to vacate after it’s been sold, the seller can be liable to default if they agreed to provide vacant possession to the buyer. That’s a complex situation that Soni said can sometimes end in legal action.

“If tenants physically refuse to leave, the seller can’t provide vacant possession – so they’re still on the hook,” he said. “In that case, the seller is in breach of their agreement to the buyer, because there are tenants still physically in there.”

An unusual legal situation can also arise, Soni said, where the buyer attempts to secure title insurance on a property but is refused due to ongoing litigation and the title insurers have refused to provide a title insurance policy on the property.

If the vendor cannot provide adequate title insurance – for instance, if the property is not considered to have good title – then the potential for litigation that affects the property increases.

Each of those possibilities means that it’s essential to deal with a law firm that has a strong track record and extensive experience in the field, Soni said, meaning that clients are reassured no matter what unforeseen event takes place.

“Just knowing that you’re dealing with a law firm that does both high-volume real estate and litigation should give a client a lot of comfort knowing they’re in good hands either way,” he said.

Sanjay Soni is senior counsel, business development and innovation at Diamond & Diamond, a Canadian law firm that offers legal services associated with home purchases, sales and residential mortgage refinancing.