The spring and summer of 2017 saw one of the hottest real estate housing markets in the Greater Toronto Area. According to the Toronto Real Estate Board, the average year-over-year sale price increased by six per cent. Buyers and sellers scrambled to take advantage of the hot market with housing prices soaring to record highs amidst bidding wars and no-condition offers.

When housing prices took a sudden, yet anticipated, decline in the fall, many buyers walked away from their Agreements of Purchase and Sale with impunity. This resulted in a spike in real estate litigation; however, many more buyers and sellers opted to re-negotiate the terms of their original agreement. In cases where the failure to close the transaction was due to the buyer being unable to secure financing because their bank/financial institution refused to fund, this proved a lot trickier for those transactions.

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In most residential real estate transactions, a buyer seeks financing to cover the balance of the purchase price once the deposit and closing costs have been factored in. In many instances, buyers finance up to 95 per cent of the purchase price through an insured-back mortgage. A prudent buyer works with a mortgage broker or directly with a financial institution to obtain a mortgage commitment before he/she “goes shopping” and once that commitment is in hand, that buyer feels great comfort in his ability to determine his “buying power”.

The buyer then locates a suitable property, makes an offer that is accepted and thereafter takes the firm Agreement of Purchase and Sale to his bank/financial institution. The institution then performs its due diligence on the property and the buyer with the end goal of funding the balance of the purchase price through a mortgage, on closing.

But what happens when the buyer is willing, but not able, to close on the deal because the bank won’t ante up the mortgage funds? What recourse does a buyer have against the bank/financial institution for failing to advance mortgage funds on closing, thereby causing the buyer to breach the terms of an Agreement of Purchase and Sale?

Generally speaking, a loan commitment can give rise to binding legal obligations between a buyer and the bank/financial institution, in which a failure to perform those obligations can give rise to an action, by the buyer, for breach of contract.  In Kerr v. Miller, the plaintiff was a lawyer who agreed to fund $60,000 to the defendant to cover certain liens, arrears and expenses related to the defendant’s property in Kentucky and to keep the latter from falling into power of sale with his bank. The $60,000 loan commitment was reduced to writing in the form of a promissory note and second mortgage on the property. The defendant only requested, and the plaintiff only advanced, $31,000 of the loan. The defendant later ran into more financial problems, which placed the property in jeopardy and the plaintiff, concerned that he may not recover on his second mortgage, commenced a suit to recover the full amount of the loan.

The court, in deciding whether there was a legal obligation for the plaintiff to advance more than the $31,000 he had advanced, found that a loan commitment can give rise to binding legal obligations and the failure to perform that obligation can give rise to an action for breach of contract.  However, the court noted that there must be a clear legal obligation to make the loan advance.  In which case, the failure to advance the loan gives rise to a claim for damages caused by the breach.

In a typical real estate transaction, a mortgage commitment usually provides that the bank/financial institution is only obligated to advance mortgage funds once a number of preconditions have been satisfied on the part of the buyer. If the buyer fails to satisfy these preconditions, the bank/financial institution is not required to deliver any funds on closing. Conversely, if the buyer satisfies all the conditions of the commitment, the bank/financial institution’s failure to advance funds in accordance with the agreement is a breach of the contract and the buyer is entitled to a claim for damages.

In Bank of America Canada v. Mutual Trust Co., a developer had taken out a construction loan with Bank of America. Later, another financier, Mutual Trust Company pledged a long-term mortgage to the developer and signed an assignment of takeout financing with Bank of America, permitting the latter to be repaid its construction loan from the funds advanced by Mutual Trust. In the early 1990s, the real estate market collapsed and Mutual Trust took the position that it was not legally obligated to advance any further funds to the developer or Bank of America unless the developer met additional conditions.

Both the trial judge and the Ontario Court of Appeal found Mutual Trust liable for the Bank of America’s damages when it, without justification, refused to advance mortgage funds.

Be careful to review the terms of your mortgage commitment in detail prior to firming up an Agreement of Purchase and Sale; otherwise, you may be on the hook to deliver the closing funds even if you are unable to obtain financing from your bank. If you or your client finds themselves in such a situation, consider obtaining an extension from the seller to allow you to assign the transaction to another buyer who is ready, willing and able to close.


  1. Extra care should be given to lenders that only give collateral charges and not ‘traditional mortgages” such as TD. When things go wrong with a collateral charge, even after closing a collateral charge mortgage gives the lender a lot of power including emptying your bank accounts and freezing other credit etc. making it very difficult for the client to maneuver and fix the problem. My opinion, the average Joe/Jane and Joe should avoid these types of mortgages.

  2. I had a client with a mortgage there. All was in good order. The clients felt comfortable. Fine by me. They wanted to buy a near million dollar home in an upscale subdivision. They were both in the medical industry with excellent credit scores.

    They had read my consumer education articles back in the 90’s and stayed current in such regards. They wanted to list with me but there was such a large variable as regards their would-be purchase price they I had inquired at the bank, knowing I only worked with pre-approved would-be buyers. Three weeks passed and their bank did not respond.

    I insisted I had to have at least a written confirmation before showing especially as their wish list was quite specific. They needed to be completely ready if the right place came for sale. Still no response from their bank where they were in good standing for many years and the bank held their current mortgage.

    Finally their frustration reached a peak. They contacted my mortgage broker who thought he had struck gold. Great clients. He took them was from their bank and put then back with their own bank at a hugely reduced rate. Needless to say they were surprised. They got their new house and he helped them open their own medical business.

    I was a little surprised too as to how he did it. But he was able to negotiate a great deal for them. He still has them as clients now helping the currently widowed wife. There’s no figuring out the banking world.

    In one of my consumer education articles I wrote to be certain to get the bank signature “printed” as well as signed. In one case a pre-approval letter on corporate letterhead couldn’t be traced. The bank employee had left the bank, and the bank would not honour the signatured paperwork. Likewise the mortgage broker sorted it out for my legitimate clients.

    Banks often are disrespectful of even important good clients. Why is that.

    Back in the 1950’s and even in the 60’s mortgage money was supplied by insurance companies. Should the world topple the current system back to that provision? And take that business away from banks? Banks are obligatory to shareholders first and foremost? Any expert thoughts out there? A boycott maybe?

    Carolyne L ?

  3. One can say what they wish regarding monies not being given by Bank of Nova Scotia …after removal of all conditions that bank sends the purchaser an email saying so sorry but a trainee did the deal and she messed up so we will not be giving you the monies…2.people lost their deposit wound up in the hospital …the other party quit their job ( in another province) and could not get it back. The property was put back on the market (decreasing at the time) and never sold. These are just common ordinary folk who could not even think straight let alone think about spending more monies for legal fees. My broker said the bank would make it right…hahah..they just refused to answer any more emails and blocked me with my negative comments from their facebook page. So the only thing I can do is try to steer people away from this financial institution.
    And yes I even went to the media!


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