Who Keeps the Deposit from a Failed Deal ?

Generally speaking when a buyer makes an offer to purchase a property in Ontario they pay a deposit (normally to the listing broker) as a good faith measure to secure performance of the contract. The deposit is held pending completion “or other termination” of the contract and can only be released pursuant to a mutual release agreed to by all parties or the order of a Court. Who gets to keep the deposit in the case of a failed transaction generally depends on who it is that breached the contract. If the buyer fails to complete the transaction for example, the seller usually keeps the deposit.

This is not however the case where the buyer is exercising a right under the contract which provides that the deposit is to be returned. A common example of this is a contract which has a condition for the buyer to obtain financing. If the buyer is unable to obtain financing within the time specified in the condition the buyer can terminate the contract and is entitled to the return of the deposit.

Because these conditions allow the buyer to terminate the contract and obtain the refund of the deposit they are often erroneously viewed as a form of “cooling off period” where the buyer can simply change their mind for any reason and rely on the condition to terminate the contract. This can be a costly mistake which leads not only to the forfeiture of the deposit but also to being sued for damages or specific performance of (ie. to complete) the agreement. A buyer who places a financing (or other) condition in a real estate agreement has a good-faith obligation to attempt to fulfill the condition in accordance with the agreement that they made. If, for example it can be shown that the buyer simply changed their mind and therefore never even attempted to obtain financing, the seller can take the position that they breached the agreement: The agreement did not fail because the seller was unable to obtain financing but simply because they changed their mind.

Often these conditions contain vague wording such as “satisfactory financing in the sole discretion of the buyer”. This can make the situation more problematic for the seller to enforce. It is therefore a good idea for sellers to insist on conditions that are far more specific as to the terms of the financing which the buyer finds acceptable. An example of this is one of the standard clauses available to realtors through the WebForms platform:

This Offer is conditional upon the Buyer arranging, at the Buyer's own expense, a new _ Charge/Mortgage for not less than _ % of the purchase price, bearing interest at a rate of not more than _ % per annum, calculated semi-annually not in advance, repayable in equal blended monthly payments, amortized over a period of not less than _ years and to run for a term of not less than _ years from the date of completion of this transaction. Unless the Buyer gives notice in writing delivered to the Seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto not later than _ p.m. on _, 20 _, 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. This condition is included for the benefit of the Buyer and may be waived at the Buyer's sole option by notice in writing to the Seller as aforesaid within the time period stated herein.

Using this type of condition is also beneficial to the seller because it affords some insight into the type of financing being sought and therefore the likelihood of the buyer obtaining the financing.

Where the buyer breaches the agreement, the seller is usually entitled to retain the deposit even in the absence of proof of damages. The deposit is in the nature of a good faith measure to secure performance of the agreement and is subject to forfeiture upon default. if the seller does suffer damages however the deposit is generally applied against the damages. If for example the buyer deposits $20,000, fails to complete the agreement and the seller has to sell the property for $40,000 less, the $20,000 would be credited against the damages of $40,000 actually suffered. In some cases such as in a rapidly rising market it is possible that the buyer defaults and the seller sells the property for more money than as specified in the failed purchase contract. In such cases some Courts have held that the buyer is entitled to the return of the deposit on the basis that the seller has been unjustly enriched or that the buyer should be relieved against forfeiture of the deposit on equitable grounds.

While the above are hopefully useful guidelines, there is no fixed rule relating to the entitlement to deposits and each case will depend on its unique facts and circumstances. If you are confronted with a dispute concerning a deposit or failed real estate transaction I invite you to contact my office at 416-628-4835 for a free consultation or message/email us through the website.