Settlement obligations for buyers and sellers

When buying or selling real estate it is important to understand the deadlines as the penalties for failing to meet these deadlines may be costly.

A contract of sale will have a deadline date for settlement. By this date, the seller must deliver the property to the buyer and the buyer must pay the remainder of the sale price to the seller. If either party fails to complete the settlement procedures by this deadline, the other party may seek a penalty and can seek to cancel the contract of sale.

There are two types of settlement breaches:

[1] Settlement delay

If the seller is able to, yet does not delivery the property by the agreed-upon deadline, or the buyer is able to pay the remainder of the purchase price but does not do so by the agreed-upon deadline, the settlement is delayed and the infringing party may be liable to pay a penalty. The contract may also be cancelled as a result.

If the buyer is unable to come up with the funds by the settlement deadline, it is also treated as a delay on the buyer’s side and the buyer may be hit with a penalty. This also applies even if the inability to obtain the funds was for reasons outside of the buyer’s control. E.g., if exchange rates moved to a point where you could no longer afford to pay for the property, you may still be obligated to pay the penalty amount to the seller.

[2] Settlement not possible

If the property is destroyed prior to settlement due to intentional or negligent actions by the seller and cannot be delivered to the buyer, the contract is considered unfulfillable. The buyer can cancel the contract and seek a penalty from the seller.

If the property is destroyed by accident and where the seller is not at fault, such as an earthquake or fire that spread from a neighboring property, the contract of sale will usually contain a special clause indicating that the buyer can cancel the contract but cannot seek any penalties from the seller.

Penalty amount

The amount of the penalty will be written in the contract of sale. In many cases it is 20% of the sale price.

It is not possible to negotiate a smaller or larger penalty other than what is expressly written in the contract of sale. E.g. the penalty cannot be increased even if actual damages exceed the penalty amount.