Contracts of Sale and a Real Estate Agent’s Duty of Care

This last September, the Alberta Court of Queen’s Bench articulated the level of skill and care expected of real estate agents when handling their clients’ affairs. Particularly, it discussed the expectations held when advising clients of the meaning and effects of different provisions in a contract of sale.

In Alvas v Barrett, the vendors of a home (the Alvases) sued the Barretts for breach of contract. The Barretts had entered into a contract with the Alvases to purchase their home. The contract included a financing condition, which allowed the Barretts to be free from contractual obligations if they were unable to obtain financing for the new home. RBC approved the Barretts for a $460,000 mortgage, but this was conditional on the sale of the Barretts’ old home. If the Barretts were unable to sell their old home, they would be unable to obtain financing and unable to purchase the new home from the Alvases.

Unfortunately, the Barretts waived the financing condition before they were able to sell their old home. The old home never sold and they were unable to obtain financing to buy the new home. The Barretts were, therefore, unable to close the purchase. Because they had waived the financing condition, they were sued by the Alvases for breach of contract. Due to a subsequent local housing market crash, the Alvases sold their house for significantly less than what the Barretts had agreed to pay. The Barretts were therefore liable for the Alvases’ loss, amounting to $67,175.99.

The Barretts then turned around and sued their real estate agent for negligently advising them throughout their ordeal.

The Alberta Court of Queen’s Bench agreed with the Barretts, finding their real estate agent liable for negligence in handling the transaction. The Court described the standard of care expected of real estate agents to “include[e] providing specific information to purchasers that in the event they do not fulfill their obligations under the contract, the purchasers risk not only losing their deposit but also any difference in price between what the Buyer’s agreed to purchase the property for, and the price the sellers ultimately receive if the sellers have to resell their property.”

The Court found the real estate agent negligent on three counts:

First, she failed to advise the Barretts, before they waived the financing condition, that they could be liable to lose more than just their deposit if they failed to close the contract. Instead she told them that “she had never heard of people getting sued, and the Alvases would just remarket the property.”

Second, she neglected to carefully review the provisions of the offer to purchase with the Barretts before submitting the offer to the Alvases.

Third, she failed to explain the risks of submitting an offer without a Sale of Buyer’s Home Condition, which would have protected the Barretts from liability if they were unable to sell their old home. This omission was particularly egregious, since the agent knew the Barretts could not close the contract unless they sold their old home. The agent was so confident in the old home’s ability to be sold that she warned against including the condition, fearing it would make the Barretts’ offer less appealing to the Alvases.

The Alvas v Barrett decision provides important insight into the standard of care expected of real estate agents, particularly with regards to contracts of sale. The Court noted that potential buyers rely on agents’ expertise and recommendations as to what to include in an offer to purchase and which conditions to later waive. It found it to be an agent’s responsibility “to provide clear, timely and fulsome advice with respect to the provisions of the…Contract,” as well as the risks faced for failure to close.

Real estate agents ought to be aware that they have a duty of exercising skill and care when advising what conditions to include and what conditions to waive in an offer to purchase. The Alvas v Barrett decision clearly indicates that real estate agents are expected to understand the meaning of provisions in contracts of sale. They also have a duty to be aware of and advise their clients of any consequences that may ensue if their clients fail to close.

For more information or questions about real estate transactions or a specific situation, please contact one of our lawyers.