Purchasers of new properties often ask what would happen to their deposit in the event that the deal does not close.
Once an Agreement of Purchase and Sale has been executed by both the buyer and the seller, the deposit will be paid into the real estate agent’s trust account where it is held until closing at which time it is credited toward the purchase price of the new property. When things go smoothly, this is a part of the deal that most people give very little thought to. Unfortunately, there are many reasons why a deal can go sour after the Agreement has already been signed but prior to closing. Sometimes buyers simply get cold feet, but other times they discover substantial problems with the property that they had not realized prior to executing the Agreement or simply have trouble obtaining appropriate financing to close the deal. When things go sour, the buyer will always want their deposit returned and generally believe that they are entitled to get it back.
There are arguments which would support both sides of the position. One might think that if a buyer backed out of a deal and the seller was able to turn around and sell the property for the same price or higher, then they have not suffered any damages as a result of the original seller backing out. Others may look at this scenario and say that price alone is only one factor and a deal has other terms and conditions which may be equally important to a seller such as closing times. I have heard some buyers trying to back out of a deal offer the seller to pay the difference if they sell the home to another buyer for less money which would allow them to at least recoup some of their deposit.
Interestingly enough, the real answer to what is right and what is wrong is a fairly simple legal analysis and doesn’t even get into all of the arguments considered above. Surprisingly, the standard Agreement of Purchase and Sale which is used by real estate agents says very little about the deposit other than the fact that it must be paid within 24 hours of the deal going firm and that the agent is to hold it in their trust account until closing at which time it is credited to the seller. What is clear, though, is that it is a deposit and not a pre-payment. The mere fact that this sum of money is referred to as a deposit in the Agreement, is enough for Ontario courts to consider it to be something which the buyer is willing to forfeit in the event of default. Thus, there is no onus on the seller to even show damages in order to be entitled to keep the deposit.
There is a small exception in cases where the deposit in question is out of all proportion to the losses suffered and that it would be unconscionable for the vendor to retain the money. This is an exception that would seldom come into play, given that in most cases deposits paid on signing are in the area of 5% – 10%.
So what does happen, practically speaking? Because the real estate agent is holding the deposit in trust, they cannot release the funds without being authorized to do so by both parties to the Agreement. Thus, unless the buyer is willing to forfeit their deposit or unless the parties can come to some sort of mutual agreement, the money will continue to sit in trust until it is released by court order. Given the cost of litigation in Ontario, and given the backlogs in Ontario courts, going to court to try and recover your deposit will ultimately end up being “throwing good money at bad money”; not worth anyone’s time.
As real estate prices in Ontario, and particularly in the Greater Toronto Area continue to rise, the 5%- 10% deposits that buyers are paying can add up to a lot of money. For these reasons it is important to know what you are getting into. Make sure you perform a proper inspection of the property with a licensed home inspector. Make sure you have the appropriate financing in place. When buying commercial properties, make sure your lawyer does some basic title searches on the property to make sure there are no peculiar easements, rights-of-way or restrictive covenants on title. When buying commercial property you also want to make sure environmental due diligence has been done to ensure you are not saddled with expensive remediation costs, or have environmental indemnities included in the Agreement of Purchase and Sale. This above all: to thine own self be true – be sure you want the property and are ready to purchase it “as is where is”.
When such large sums of money are up for stakes it always pays to be sure and it never hurts to consult a professional.
