When is a Verbal Agreement Binding in the Purchase of Real Estate?

verbal agreement

A recent Ontario case between a father and a daughter concerning the transfer of property has stressed the importance of having a written contract in place to set out the specific terms of a purchase agreement, even if the agreement is between family members. In Downey v. Arey, 2021 ONSC 2781 the court determines whether the verbal agreement may be binding, and what parts, if any, of the agreement may still be enforceable.

Verbal Agreement to Purchase Property between Father and Daughter

The property in question was a Mississauga, Ontario home owned by the defendant, Mr. Arey. The plaintiffs were Mr. Arey’s daughter and son-in-law (a construction contractor). The plaintiffs lived in the Mississauga home with their two teenage children. The parties agreed that there was a verbal agreement in place whereby the daughter would purchase the house from her father, with the closing date originally set for August 31, 2016. The plaintiffs claimed they and Mr. Arey orally agreed to extend the closing to May 31, 2017 under certain terms. In contrast, the defendant claimed he never agreed to extend the agreement to May 31, 2017.

Verbal or non-written agreements between family members or close friends are relatively commonplace. The close personal relationship between friends and family often leads parties to believe a written agreement is unnecessary; however, the close personal relationship doesn’t make verbal agreements any less problematic. As stated by the trial judge in this case “Absent a written agreement, the parties’ expectations about the transfer went unexpressed, terms about the agreement were uncertain, and assumptions made by each were unshared.”

The uncertainty surrounding the verbal agreement ultimately led to a nightmare situation where litigation ended up being necessary between a daughter and her father.

Disagreement Over the Fair Market Value of the Home

In April 2017, the defendant refused to close the sale, demanding more money to meet the increased market value of the home. The plaintiffs were not willing to pay more money, so the father demanded they vacate the house so he could sell it for full value on the open market.

The plaintiffs then sued the father for specific performance, or in the alternative, damages for breach of contract, punitive damages, and “special damages” equal to the cost of renovating the home and potential lost profit. The father filed a counter-claim for rent payments starting from the date he demanded the couple and their teenage children vacate the house.

Specific Performance for Breach of Contract

Specific performance is an equitable legal remedy for breach of contract. The party who commits the breach is required to perform a specific act, usually to fulfill the terms of the agreement. Specific performance is typically reserved for situations where monetary damages are inappropriate or inadequate, such as real estate transaction agreements. No two properties are identical. Even carbon copy homes built by the same developer, at the same time, using the same materials, sit on different pieces of land, making them uniquely distinct. One of the parcels of land might have a slightly better view of a lake or be closer to certain amenities, for example.

Specific performance with respect to real estate agreements usually requires the sale/purchase of property to be completed. This was the remedy sought by the plaintiffs in Downey v. Arey
who claimed the house was unique and damages were therefore insufficient.

Transfer of Land must be in Writing

Section 1 of Statute of Frauds, R.S.O. 1990, c. S.19 states that an agreement to transfer property must be in writing and signed by both parties. The Statute of Frauds gets its name from its historical purpose which was to prevent fraudulent dealings in land transfers arising from false or fraudulent oral testimony provided in the courts. However, despite not having a written agreement in place in Downey v. Arey, both parties agreed that the plaintiff’s renovations constituted partial performance of their verbal contract. In other words, failure to comply with the Statute of Frauds for lack of a written real estate agreement did not exclude the existence of a contract. Statue of Frauds notwithstanding, the court found a valid agreement between the parties did not exist because the verbal contract negotiations failed the test for determining whether an oral agreement existed.

Contract Negotiations or an Intention to Contract do not create an Enforceable Contract

Citing the Ontario Court of Appeal’s decision in S & J Gareri Trucking Ltd. v. Onyx Corporation, 2016 ONCA 505, the judge noted that for any oral agreement to exist, there has to be a “meeting of the minds” – a consensus between the parties to the contract as to the terms of the contract. A mutual intention to enter into a contract is not sufficient. “It is necessary that the essential terms of the agreement are also sufficiently certain.” Contract negotiations cannot create an enforceable or binding agreement where there is uncertainty about the essential terms or if parties do not intend form a binding contract until a formal written document has been executed.

In Downey v. Arey, there was an essential contractual term that was not agreed upon between the two parties – the selling price. Although there was an agreement to pay $850,000, there was disagreement over when and how the “family discount” was to be applied. The father claimed he applied a discount of $100,000 to reduce the price to $850,000, while the daughter and her partner believed the discount was to be applied to the $850,000. Since there was no written record, and each respective party to contract honestly believed their version of how the discount was to be (or already had been) applied, there was no “meeting of the minds” on a vital term of the contract. As such, the judge held that a valid contract did not exist. Consequently, the plaintiffs were unable to claim specific performance on the contract.

Damages for Compensation Awarded despite the Absence of a Valid Contract

The plaintiffs were awarded $163K in damages as compensation for the renovations made to the home. The plaintiffs we permitted to remain in the home until it was sold and pay property taxes, property insurance, and any other expenses that the father would have been paying as the owner of the property.

The case serves as a potent example of the value of written contracts, even when the parties involved are family. It also highlights the importance of seeking the advice of a knowledgeable real estate or contract lawyer to ensure compliance with all applicable laws to create a valid and enforceable agreement.

Contact the Real Estate & Contract Lawyers a Prudent Law to ensure Agreements are Legally Valid and Enforceable

The lawyers at Prudent Law in Mississauga are trusted advocates for real estate transactions, real estate litigation, and contract disputes. We provide practical advice and passionate representation in both residential and commercial real estate deals. If you are contemplating the sale or acquisition of a piece of real property and would like to discuss it with one of our experienced real estate lawyers, please call us at 905-361-9789 or contact us online.

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