Seller Beware: When a Homebuyer Fails to Deliver the Deposit

There is a growing trend in Toronto and the GTA of residential real estate purchasers failing to provide the agreed-upon deposit after signing an Agreement of Purchase and Sale. This may be an unforeseen consequence of recent changes to the process of purchasing and selling property, but regardless of the cause, it should be guarded against by taking precautions to safeguard the rights of residential real estate sellers.

In Ontario, a deposit is typically due within 24 hours of an Agreement of Purchase and Sale being accepted, unless otherwise agreed to or specified within the Agreement. However, as a consequence of the COVID-19 pandemic, more and more purchase offers are being submitted via email, with the deposit cheque due upon acceptance of the offer by the seller.

This has led to a recent trend where buyers are submitting offers that are accepted and then not providing the deposit cheque, with the speculation being that purchasers are providing offers on multiple properties at the same time and then following through only with the one that they like best or get the best deal on.

The Law Concerning Deposits

In Canada, deposits form a unique aspect of Canadian contract law. Normally, contract law is based upon the notion of damages so that if someone breaches a contract or fails to carry out their duties under the agreement, the aggrieved party will be compensated for damages that they suffered as a result. Deposits work somewhat differently. Where a buyer gives a seller or vendor a deposit to secure the performance of a contract for purchase and sale of real estate, the deposit is forfeited if the purchaser refuses to close the transaction unless the parties bargained otherwise (normally, by stipulating this in the contract or the Agreement of Purchase and Sale).

It may also be possible for the buyer to have their deposit returned if the amount of the deposit is so large that a court would consider it “unconscionable” for the buyer to not get the money back. Of course, the circumstances around why the contract went unfulfilled would also be a factor in such a decision.

If a buyer paid a deposit of, say, greater than 50% of the overall purchase price, it would likely be deemed unconscionable for the seller to be able to keep the deposit if the seller didn’t close the deal.

If the buyer is the one who fails to “close” the purchase deal by not providing the rest of the funds required by the purchase, they are normally out of luck. This is true even if there are no actual damages to the seller – that is, if the seller turns around and sells the property to someone else for the same price or higher than what they had originally agreed to sell to the defaulting buyer. In the landmark decision of Tang v. Zhang, (which has been relied upon by other provincial courts across the country, including the Ontario Court of Appeal) the B.C. Court of Appeal affirmed that if the buyer is the one that is at fault, the seller is entitled to keep the deposit even if they haven’t suffered any damages.

The reason for this uniqueness seems to relate to the good faith intentions of the parties in question, particularly the buyers. In the Tang case, the Court affirmed that a deposit is technically not part of the Agreement of Purchase and Sale (although the funds count towards the purchase price). Rather, a deposit “stands on its own as an ancient invention of the law designed to motivate contracting parties to carry through with their bargains” and creates (out of fear of its forfeiture) an incentive for the buyer or purchaser to provide the remaining funds to complete the purchase.

Seller’s Rights

Given that the law concerning real estate deposits doesn’t generally favour the buyer, we can see perhaps why this trend of buyers withholding the deposit has emerged. However, sellers are not totally without legal recourse where a buyer fails to provide a deposit. They can sell to another party and then bring a claim against the buyer for a breach of contract.  Although normally the damages to the seller have to be palpable enough to make this worthwhile given legal costs involved.

Damages in these instances can be calculated by comparing the lower price for which the seller subsequently sold the property, versus the higher price under the original contract. However, given the fact that a failure to provide a deposit is becoming more common, sellers are making the choice to become proactive by including stricter terms in the Agreement of Purchase and Sale.

Drafting Real Estate Agreements of Purchase and Sale

To reduce the chance a buyer will sign an Agreement, only to walk away before providing a deposit, sellers are starting to have additional contractual terms and covenants included in their purchase agreements. These terms impose additional warranties and obligations on the part of buyers in the event they do not provide a deposit after making a firm offer.

All of the above provides a good illustration as to why it is a good idea to consult with a lawyer for a real estate transaction, whether you are a buyer or a seller, before signing the Agreement. Often, the parties only consult with a real estate lawyer once the Agreement is in place, however, a skilled lawyer can provide much-needed advice on the terms of the Agreement before signing.

Safeguards either limiting liability on the part of the buyer in the event that they are unable to complete the deal or protecting the rights of a seller should the buyer fail to follow through with the deposit can be negotiated and added into the Agreement. Both buyers and sellers should seek the advice of an experienced real estate lawyer in such situations to avoid time-consuming and costly legal pitfalls or snags in the purchasing and selling of real property.

The lawyers at Prudent Law in Mississauga are trusted advocates with respect to real estate transactions and real estate litigation. 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 you’d 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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