In the world of real estate transactions, the period between signing an Agreement of Purchase and Sale (APS) and the actual closing date can be fraught with unexpected challenges. A recent Ontario Superior Court of Justice decision in McDonald v. Lowrie highlights the importance of understanding your contractual obligations when disaster strikes a property before closing.

When Fire Destroys a Dream Home

Imagine finding your perfect century home, signing all the paperwork, and then learning it’s been destroyed by fire before you even get the keys. This nightmare scenario became reality for a buyer in Tillsonburg, Ontario in 2024.

The buyer had entered into a standard APS to purchase a rural century home on a two-acre lot for $775,000, providing a $25,000 deposit. Just weeks after signing, but months before the scheduled August closing date, the property was devastated by fire.

Understanding Insurance Clauses in Your APS

Most standard real estate agreements contain provisions addressing what happens if a property suffers “substantial damage” before closing. In this case, the APS included an insurance clause that provided the buyer with two options:

1. Terminate the agreement and receive a full refund of the deposit
2. Proceed with the purchase and receive the insurance proceeds

This type of clause recognizes that significant property damage changes the fundamental nature of what the buyer agreed to purchase.

Timeline of Events

The case unfolded as follows:

• Early May 2024: Buyer and seller sign the APS with August closing
• May 22, 2024: Fire destroys the home
• July 2024: Buyer invokes the insurance clause, requesting coverage details
• Early August: Seller provides insurance policy information
• August 26: Seller forwards insurer’s settlement options:
  • Rebuild option (contractor quote: $973,813.94)
  • Cash settlement of $749,375.37
• August 30: Final extended closing deadline passes without completion
• September 3: Seller terminates the APS, retaining the $25,000 deposit

Where the Buyer Went Wrong

According to the court, the buyer made a critical error. Rather than choosing one of the two options provided in the insurance clause, the buyer attempted to introduce a new condition—demanding a guarantee of minimum insurance proceeds before closing.

This requirement went beyond the terms of the original agreement. The insurance clause didn’t guarantee any specific amount of insurance proceeds or their collectability; it merely gave the buyer the right to those proceeds, whatever they might be.

The Court’s Decision

The application judge determined that:

• The property remained at the seller’s risk until closing
• The seller had met all obligations by providing insurance details
• The buyer had sufficient opportunity to review the insurer’s settlement position
• The buyer’s demand for a guaranteed minimum payout constituted a new condition
• By adding this condition, the buyer was not “ready, willing, and able” to close under the original terms

As a result, the court dismissed the buyer’s application for specific performance and allowed the seller to retain the $25,000 deposit.

Lessons for Real Estate Transactions

This case offers several important takeaways:

1. Read and understand your APS thoroughly, particularly clauses addressing property damage before closing
2. Consider your options carefully when disaster strikes before closing
3. Act decisively within the framework of your existing agreement
4. Avoid introducing new conditions not contained in the original APS
5. Seek legal advice promptly when complications arise

When substantial damage occurs to a property before closing, buyers should carefully evaluate their options under the APS rather than attempting to negotiate terms beyond the scope of the original agreement.

Remember that while the time between signing and closing might seem like a mere formality, it’s a period where significant changes can occur—and understanding your contractual rights and obligations during this time is essential to protecting your interests.

– Kai T.

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This article is based on the Ontario Superior Court of Justice decision in McDonald v. Lowrie. The information provided is for educational purposes only and should not be considered legal advice. Consult with a qualified real estate attorney for guidance specific to your situation.