4 Penalties for Not Closing on Time
A closer look at the penalties a buyer may incur if they fail to close on time on the purchase of a home in Ontario.
By Emily Southey | 7 minute read
Missing a closing date is serious business. When a buyer fails to close escrow on time, it can have major ramifications. At a minimum, the purchase contract, which stipulates a closing date, is put in jeopardy. In a worst-case scenario, the contract could expire, requiring the buyer to request an extension from the seller, which they may not agree to. Four penalties for a buyer not closing on time.
The penalties for a buyer not closing on time vary but may include the following:
1. The seller might keep your earnest money deposit
When you buy a house in Ontario, you must put down a deposit. This is what’s known as an earnest money deposit or good faith money. It shows the seller you have the necessary funds to purchase their home. Traditionally, earnest money deposits are returned to the buyer on the closing date. From there, the buyer can put their deposit toward a down payment or other out-of-pocket expenses, such as closing costs. However, if you fail to close on time, the seller has the right to keep your deposit, meaning you won’t receive this money back. Earnest money deposits are usually around 5% of the purchase price of the home, which means you would be out $25,000 on the purchase of a $500,000 home.
“One of the most serious consequences of a buyer not closing on time is the seller cancelling the sale.”
2. The seller may cancel the sale
One of the most serious consequences of a buyer not closing on time is the seller cancelling the sale. In certain circumstances, a seller may decide to walk away from the sale altogether. Perhaps at this point, they think they can get a better offer, the negotiations become disrespectful, or they are simply frustrated with the delayed closing date. Whatever the reason, the seller might have a legal right to cancel the sale depending on the contract. Generally, if the buyer has a legitimate reason as to why they missed the closing date, a court is likely to rule in favour of the buyer, allowing for a reasonable postponement that gives the buyer an additional 30 days to close the sale. But if the reason for the delay is illegitimate, the seller can opt to cancel it outright. That said, sales being cancelled due to a delayed closing date don’t happen too often. This is mainly because the sale is usually in the best interests of both the buyer and the seller. Cancelling the sale would mean starting the selling process all over again, and most sellers don’t want to go through that.
Time of the essence clause
Another situation in which a seller has the legal right to cancel a sale, whether the reason for the delay was legitimate or not, is if the contract contains a time of the essence clause. If your purchase agreement contains this clause, the closing date is a hard deadline, and if it is missed, the contract is null and either party has the right to walk away. A buyer’s reason for not closing on time is irrelevant when a time of the essence clause is involved.
3. The seller could charge you a per diem
If the closing date passes, the buyer will have to ask the seller to extend the closing date. If the seller agrees to do so, it might come with stipulations like a per diem. A per diem is a daily rate charged by the seller to the buyer. This charge is not only for the inconvenience of having to extend the closing date but also to help the seller cover the additional fees that come with the postponed closing date, such as extra mortgage, tax, or insurance payments. Thankfully, the average per diem is one-thirtieth of the seller’s house expenses, which shouldn’t amount to too much. However, it is still an additional financial burden that the buyer is forced to take on.
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4. The seller could sue you for damages
One final penalty for a buyer not closing on time in Ontario is that the seller could sue you for damages. Even if you missed the closing date due to a circumstance beyond your control or another unintentional reason, the seller could decide to take legal action as you would technically be in breach of your contract. Should the seller decide to take legal action, they can ask the court to be reimbursed for the quantifiable monetary damages incurred, such as the continued cost of renting a storage unit to house their furniture for stagings or the extra mortgage, tax, or insurance payments that had to be made. In an extreme case, the seller might even sue you, requesting that the court force you to go through with the home sale regardless of whether you no longer want to buy the home or your financing fell through.
Frequently Asked Questions
What does closing in escrow mean in real estate deals?
Closing escrow in a real estate deal is when a buyer and seller have each met the terms of the purchase agreement. Closing escrow signals that the deal is done and the sale of the home is complete. More specifically, escrow is a third party where the funds for the transaction are held before they are transferred from one party to another. Closing escrow is the process by which the funds being held are released to the respective parties. Closing escrow does not always happen on the actual closing date.
Can a buyer back out of buying a home?
Most purchase agreements outline the reasons a buyer or seller can decide to cancel the sale without paying a penalty. However, deciding not to proceed with a sale simply because you changed your mind is typically not included. If you back out of a home sale for a reason not outlined in the contract, you end up facing severe penalties, such as losing your earnest money deposit. Ideally, buyers should only cancel a home sale for a reason listed as a contingency in the contract.
What is a closing date in real estate?
A closing date, sometimes referred to as a completion date, is the day when the final payments for the home are due. If the buyer makes them on time, ownership of the property will be officially transferred to the buyer. The title transfer to the home is usually conducted by either the buyer or seller’s real estate lawyer.
What happens if the lender misses the closing date?
If the lender fails to approve the buyer’s loan by the closing date, then the purchase agreement may expire. At this point, the buyer should kindly ask the seller to extend the closing date (typically by 30 days). The seller might agree to push back the closing date to give you more time for your lender to approve your loan, but they don’t have to. Instead, they could decide to walk away from the sale altogether or agree to the extension but with contingencies, such as a per diem. Ultimately, if your loan is not approved, the sale is likely to fall through completely.
Can a seller cause closing delays?
Typically, it is the buyer who causes closing delays. Although the reasons vary, they most commonly include financing issues, such as the failure to obtain a loan approval on time. However, a delayed closing date may also be caused by an appraisal that is lower than the purchase price or a problem discovered during the final walk-through of the home.