Is a Condition on Financing or Inspection a Guaranteed Way to Get Out of Your Purchase Agreement?

John Pasalis in Home Buying Tips

Contract When buyers decide to make an offer to purchase a home their real estate agent typically includes two conditions in the agreement of purchase and sale.    The condition on financing typically gives the buyer several days to arrange satisfactory financing for their purchase.  The condition on an inspection gives the purchaser an opportunity to hire a home inspector to ensure there are no major problems with the house.  If the purchaser is unable to arrange financing or is unsatisfied with the home inspector’s report they typically have the option to walk away from the deal.

Let’s take a look at a typical condition on a home inspection:

This Offer is conditional upon the inspection of the subject property by a home inspector at the Buyer's own expense, and the obtaining of a report satisfactory to the Buyer in the Buyer's sole and absolute discretion. Unless the Buyer gives notice in writing delivered to the Seller not later than FIVE (5) banking days following acceptance of this offer that this condition is fulfilled, this Offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction.

Many home buyers I talk to believe that conditions like the one above guarantee that they can get out of a purchase agreement if they change their mind about the home.  Unfortunately, breaking an agreement isn’t always that easy. 

Any time a buyer offers to purchase a home they need to include a good faith deposit with the offer which is typically between 3%-5% of the home’s purchase price.  The Buyer’s deposit is usually held in trust in the listing brokerage’s real estate trust account.  The above clause states clearly that if the Buyer walks away from the deal their deposit shall be returned to them in full without deduction. 

What it doesn’t say is that in order for the brokerage to return the deposit they must receive written permission from the seller to release the funds being held in trust.  It also doesn’t say that sellers have the right to refuse to release the deposit should they suspect that the buyer was not negotiating in good faith.

What do I mean by not negotiation in good faith?  Suppose a home inspection report shows no material deficiencies with the property being purchased.  If this is the only condition in the agreement, the buyer may have a hard time getting out of the deal on the basis of a poor home inspection.  If the buyer tries, the seller could ask for a copy of the home inspection to see what deficiencies were noted in the report.  If there were no material deficiencies the seller could not only withhold the deposit but could try to force the purchaser to honour their original agreement. 

If the seller refuses to release the deposit the funds remain in the listing brokerage’s trust account until both parties agree to settle the dispute.  If a settlement cannot be reached one party would need to sue the other to find out who is entitled to the funds held in trust.

Most sellers want to avoid confrontations and litigation which is why they often release a buyer’s deposit when the purchaser wants to walk away from a conditional deal.  Other sellers are not as amicable.

Conditions in an agreement don’t guarantee that you can get out of the agreement easily.  Conditions are designed to protect the buyer’s best interests, but this assumes that the buyer is negotiating in good faith.

Home buyers should be certain that they are happy with the home they plan on buying and are negotiating in good faith before making an offer to purchase a home. 

John Pasalis is the Broker owner of Realosophy Realty Inc in Toronto. Email John

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