Property Loss Before Closing: Fire or Flood in Ontario

A fire, flood or storm between signing and closing is stressful for both sides. The buyer may wonder whether they must still close on a damaged home. The seller may worry about insurance, and about whether the sale will fall apart.

How risk and insurance before closing apply to you depends on your situation and on the wording of your Agreement of Purchase and Sale, so it is worth confirming with a lawyer. This article explains what to check, what happens to the deposit, and when to get legal advice quickly.

Start with the Agreement of Purchase and Sale

If the property is damaged before closing, start with your own Agreement of Purchase and Sale. What you can do, and who carries the risk until closing, depends on the wording of your agreement and on your situation, so it is worth confirming with a lawyer. Do not rely on what a neighbour or friend experienced, because the wording of each agreement can differ.

Look for any clauses on insurance, risk, damage and the condition of the property at closing. If amendments or schedules were added, read those too.

First steps after damage is discovered

• Make the property safe and take photos and notes right away.
• Notify the seller's insurer, and the buyer's insurer if the buyer has arranged coverage.
• Tell your real estate lawyer and agent immediately, in writing.
• Keep all repair estimates, reports and insurer correspondence.
• Do not sign any amendment, waiver or release until you have had legal advice.

What happens to the deposit

Under the Trust in Real Estate Services Act, 2002, s. 27(1), every brokerage must keep a trust account in Ontario. It must keep money held in trust for others separate from its own and pay it out only according to the terms of the trust. A deposit received by the brokerage that is to hold it under the Agreement must be put into that brokerage's real estate trust account within five business days of receipt.

When a deal fails, the brokerage should release the deposit only under a release or direction signed by all parties to the Agreement, or under a court direction. That means a buyer cannot simply demand the deposit back, and a seller cannot simply keep it, if the other side disagrees.

Deposit protection and its limits

RECO's consumer deposit insurance covers deposits held in a brokerage's real estate trust account against events such as brokerage theft, fraud, insolvency or misappropriation. It pays up to $200,000 per claim and up to $4 million for all claims arising from a single event, at no cost to consumers.

Exception: it does not apply where a deal has failed and the buyer and seller simply cannot agree on who gets the deposit. A dispute over damage and cancellation is exactly that kind of disagreement, so the deposit may stay in trust until the parties sign a release or a court gives direction.

If one side refuses to close

If a seller refuses to close, a buyer may sue. A buyer who starts a lawsuit that puts an interest in land in question has no notice effect against outsiders until the court issues a certificate of pending litigation and it is registered on title. A court may discharge the certificate in several cases, including where the party claims money instead of the land or can be adequately protected by other security.

A court that can order specific performance may award damages in addition to, or instead of, specific performance. Which remedies make sense depends on the agreement and the damage, so get advice before taking a hard position.

What to do next

Act quickly and keep everything in writing. Send your lawyer a copy of the agreement, all amendments, insurance details and photos of the damage. Ask specifically what the risk clause says, what notice you must give, and whether your closing date is affected. A lawyer can confirm your rights before you agree to close, extend or cancel.

Frequently asked questions