Buying a House: Do You Know the Extent of Your Obligations Regarding Financing?
As July fast approaches, you have perhaps recently signed or are about to sign a promise of purchase for your future house. If this promise is conditional on obtaining a hypothecary loan (mortgage), do you know the extent of your obligation to seek financing?
The buyer’s obligation to seek financing
Under a promise to purchase that is conditional on obtaining a loan, promissory buyers have an obligation of means; that is, an obligation to take all necessary measures to obtain financing.
Here is some advice inspired from a recent decision of the Court of Appeal that will give you a better understanding of what this obligation consists of:
1. Make concrete, serious and sustained efforts
To fulfill their obligation, buyers must make concrete, serious and sustained efforts. Securing financing is not actually required, but if their efforts fail, buyers must be able to show that the loan was not obtained despite their having acted with all due diligence, generally after being refused more than once by various potential lenders.
2. Adopt a proactive rather than a wait-and-see attitude
A proactive attitude is required. If the failure to secure financing is due to passivity, negligence or a lack of seriousness, the buyer has not fulfilled his or her obligation towards the seller.
3. Act in good faith
While it goes without saying, this is worth emphasizing because it is not a subjective consideration, as some may believe. In the eyes of the law, the requirement to act in good faith is not necessarily met by an absence of bad faith. A person may be well intentioned yet still not meet the legal requirements of good faith, by breaching objective standards of conduct as generally recognized in society. Thus, subjective good faith will not suffice to release buyers from their contractual obligations and liability.
A decision rendered by the Court of Appeal on May 31, 2018 illustrates all of the foregoing. In that case, the Superior Court had concluded that the buyers failed to abide by the provision in the promise to purchase whereby they undertook “to take in good faith, as soon as possible and at their expense, all steps necessary” to obtain a hypothecary loan. This in fact is the wording contained in the standard-form promise to purchase of the OACIQ, the self-regulatory authority of real estate and mortgage brokerage in Québec.
In this case, the buyers had made only two loan applications. The first was to a Senegalese bank that did not finance real estate purchases in Quebec. The second was made to another Senegalese bank, by only one of the buyers, who had no assets or income, such that the application was thus doomed to fail. The Superior Court thus ordered the buyers to pay the sellers damages equal to the difference between the price specified in the promise to purchase and that for which the house was ultimately sold to other purchasers.
The Court of Appeal upheld this decision, finding that the buyers’ conduct was quite insufficient to discharge their obligation in terms of seeking financing.
When we sign a promise to purchase a house, we are undertaking to conclude what for most of us is arguably one of the most important transactions of our lives. The Court of Appeal has just reminded us that our efforts to finance that purchase must be commensurate with the seriousness of this undertaking.
That being said, the standard-form promise to purchase of the OACIQ allows the parties to add “other representations and conditions”. If the promissory buyers have plans to obtain financing that depart from the norm, there is an opportunity to specify just how they intend to go about it. If the promissory sellers are in agreement, such clarifications could reduce the legal risks involved.
The author would like to thank Ms. Aude Berger, student-at-law, for her assistance in the preparation of this article.
1 Seck v. Tremblay, 2018 QCCA 887. The author successfully represented the promissory sellers at first instance and on appeal.