It is one of the most distressing phone calls a real estate lawyer receives. A buyer — sometimes days before closing, sometimes the morning of — calls to say they cannot close. The financing did not come through. The job fell through. They changed their mind. The market dropped and the property is no longer worth what they agreed to pay.
Whatever the reason, the legal exposure is serious. Understanding what happens when a real estate closing fails in Ontario is essential for any buyer who finds themselves in this position — and for any seller who is about to deal with the aftermath.
The Legal Weight of an Accepted Offer
When a buyer’s offer is accepted and any conditions are waived or satisfied, the Agreement of Purchase and Sale becomes a binding legal contract. Both parties are obligated to complete the transaction on the agreed-upon closing date at the agreed-upon price. From that moment forward, a buyer who fails to close is in breach of contract — full stop.
The reasons for failing to close are largely irrelevant from a legal standpoint. Whether the buyer’s lender withdrew approval, the buyer discovered a personal financial problem, or the buyer simply decided the deal was no longer attractive, the seller’s legal position is the same: the buyer breached the agreement.
What Happens to the Deposit
Deposits are held in trust — typically by the seller’s brokerage — pending closing. When a buyer fails to close, the deposit does not automatically go to the seller. The legal process depends on the circumstances.
The Deposit Forfeiture Process
If the buyer fails to close and the parties cannot agree on what happens to the deposit, the deposit holder (typically the listing brokerage) will interplead the funds — meaning they pay the deposit into court and let the court decide who gets it. This is a formal legal process, and it is one reason buyers should never assume that failing to close simply means losing their deposit and walking away.
In practice, most deposits are eventually forfeited to the seller — but only after the seller can demonstrate that the buyer breached the contract and that the deposit is owed as damages. If the seller relisted and sold the property for the same price or more, the legal outcome can be more nuanced.
The Seller’s Right to Sue for Damages
The deposit is often the least of a defaulting buyer’s legal problems. A seller who suffers a failed closing is entitled to sue for their actual losses — and those losses can significantly exceed the deposit amount.
Ontario courts have awarded sellers damages that include:
- The difference between the original purchase price and the price ultimately achieved on a resale — particularly significant in a declining market
- Carrying costs incurred during the period between the failed closing and the eventual sale (property taxes, utilities, mortgage interest, insurance)
- Real estate agent commissions paid on both the failed transaction and the re-listing
- Legal fees associated with pursuing the claim
In a market where property values have declined, the gap between what a buyer agreed to pay and what the market will bear can be substantial. A buyer who walked away from a $1.2 million purchase in 2022 that ultimately resold for $950,000 in 2023 faced a potential damages claim of $250,000 — plus carrying costs and legal fees — in addition to losing their deposit.
When Buyers Have a Defence
Failed closings are not always entirely the buyer’s fault. There are circumstances where a buyer may have a legal defence:
- Seller misrepresentation: If the seller made material misrepresentations about the property that the buyer relied upon, the buyer may have grounds to argue the contract should be set aside.
- Seller’s own breach: If the seller failed to satisfy their own closing obligations — failing to clear title defects, failing to provide vacant possession, or failing to deliver required documents — the buyer may not be the party in breach.
- Force majeure: In extraordinary circumstances, a buyer may argue that events beyond their control prevented closing — though courts apply this defence narrowly in real estate contexts.
These defences require legal analysis and should be explored immediately with your lawyer. Do not assume you have a defence — and do not assume you do not.
What Buyers Should Do When They Cannot Close
Time is critical. The moment you know — or even suspect — that you may not be able to close, call your real estate lawyer. Do not wait until the night before. The earlier your lawyer is involved, the more options are on the table:
- Explore extension: Your lawyer can contact the seller’s lawyer to negotiate a closing extension, giving you additional time to sort out financing or other issues. Sellers may agree, particularly if it avoids the cost and uncertainty of relisting.
- Explore assignment: In some cases, you may be able to assign your APS to another buyer — effectively selling your position in the deal. This requires the seller’s consent (or a specific assignment clause) and has its own legal complexity.
- Negotiate a mutual release: If both parties agree the deal cannot proceed, a mutual release terminates the agreement and addresses what happens to the deposit. This is cleaner than a default but requires agreement on terms.
- Assess your exposure: If none of the above is possible, your lawyer can help you understand the realistic range of your legal exposure so you can make an informed decision about how to proceed.
For Sellers: What to Do When Your Buyer Cannot Close
If your buyer fails to close, resist the urge to act unilaterally. The legal framework requires specific steps to properly preserve your right to the deposit and any additional damages:
- Give your lawyer immediate notice of the failed closing
- Do not release the deposit without legal advice
- Mitigate your damages — relist the property promptly and at a fair price
- Preserve all records of expenses incurred as a result of the failed closing
Sellers who relist and sell quickly — even at a lower price — are in a stronger legal position than those who let the property sit. Courts expect sellers to mitigate their losses.
Final Thoughts
A failed closing is one of the most stressful events in a real estate transaction — for both buyers and sellers. The legal consequences are real and potentially severe. The best protection is understanding your obligations before you waive conditions on your offer. Once a deal is firm, it is firm — and the time to call a lawyer is the moment anything suggests that closing may be at risk.
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Goldstone Law Professional Corporation serves clients across Mississauga, Brampton, Oakville, and the greater GTA in real estate, corporate, estate, and mortgage law. Whether you are buying your first home, structuring a business deal, or planning your estate, our team provides the clear, practical legal guidance you need.
Visit goldstonelawpc.com or call us at 905-595-9917. We are located at 201-186 Robert Speck Parkway, Mississauga, ON L4Z 3G1.
Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified Ontario lawyer.
This article is provided for general information only and does not constitute legal advice. For advice about your specific situation, please contact Goldstone Law PC directly.