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Losing your Deposit if you Fail to Close on a Real Estate Deal

Property Lawyer Near Me – Your Agreement of Purchase and Sale (“APS”) is a legally binding contract between a vendor and purchaser. This agreement outlines the terms and conditions of your real estate purchase.

In a real estate transaction, a purchaser offers an initial deposit (as a percentage of the purchase price) and this deposit is used to demonstrate the purchaser’s commitment to the vendor to honour the transaction. When the sale goes according to plan, the deposit is applied either to closing costs or remainder of the purchaser’s down payment.

Once the purchaser and the vendor have signed the APS , they are legally obliged to complete the transaction under the terms in the contract. This makes walking away from the purchase a challenge, which results in a breach of contract situation.

Can You Get Your Deposit Back?

However, what happens to the initial deposit if a purchaser backs out of the sale?

The short and easy answer is: sometimes, but rarely. Once the APS is signed, it becomes very complicated; and, to not follow through with the transaction places the purchaser in breach of their obligation to carry out the purchase.

It is simpler to assume that, once paid, a deposit is likely to be forfeited unless the seller agrees to mutually terminate the APS or there is a bona fide legal issue going to the root of title discovered during the title search process. Following these assumptions, let’s look at instances where the deposit will be forfeited:

if no damages are experienced by the seller due to a contract breach, the deposit may still be forfeited by the purchaser; and,
a considerable deposit does not provide relief from forfeiture in court, and, again, regardless of whether he vendor suffers actual damages due to the purchaser’s failure to close.

Here is some case law.

In the case between In Koutcherenko v. Queensway Homes Inc. 2013 ONSC 3350, the following are the facts:

An agreement of purchase was entered for a townhouse, the purchaser paid $35,000 deposit to the vendor.
The transaction with the vendor was not closed and the vendor sold the townhouse to a different buyer.
The purchaser filed an action against the vendor for repayment of their $35,000 deposit.

The court dismissed their action on the basis that the purchaser did not act reasonably. The purchaser appealed the decision, and that action was also dismissed. The purchaser was given the opportunity to find an alternative buyer as a “potential assignee” of the contract, prior to the closing date, and he failed to do so. Further, the judge found that the purchaser did not act reasonably and therefore was not consistent with that of a “bona fide” purchaser who was sincerely willing and eager of closing the deal. This case clearly demonstrates the even if no damages are experienced due to a contract breach, the deposit can still be forfeited.

In the case between Thomas v. Carreno, 2013 Carswell Ont 1282, the following are the facts:

An agreement of purchase and sale was entered by the purchaser and the vendor for the sale of a property, the purchaser paid $100,000 deposit.
Not long after entering the agreement, the purchaser discovered an open building permit for renovations that were previously started.
The vendors were not able to close the permit prior to the closing date, therefore the transaction did not close.
The purchaser applied for a return of their deposit and incidental expenses, but it was dismissed along with their appeal.

Further, it was discovered that the purchaser’s obligation would have been satisfied if they attained title insurance as intended by the agreement. There was no error found by the judge on the vendor’s part, and no error found upon appeal.

Furthermore, in Sinha v. Shabestari, 2018 ONSC 298,

Purchasers entered into an agreement for a vendor’s property for $1,202,000 with paid deposit of $60,000.
Purchasers could not close the transaction because they could not arrange financing.
The vendors relisted the property and sold it for $1,273,000.
The vendors brought a motion seeking that the purchasers deposit be forfeited and paid to them. The motion was granted.

The court ruled that the agreement did not speak to what would happen if the purchasers failed to complete the contract; and if the purchasers did not intend to complete the contract, it should have been clearly outlined in the agreement. Also, the agreement did not stipulate that the deposit was to be refunded if the purchasers did not complete the contract, therefore the vendors had a right to retain the deposit.

Bottom Line

Vendors are entitled to the forfeiture of a purchaser’s deposit and do not need to prove damages or mitigate their losses. When a purchaser provides a deposit, it is implied that breaking the contract forfeits the deposit to the vendor. This is true even when the vendor re-lists the property and sells for more than the original price. Both vendors and purchasers may contract out the common law relating to forfeiture of deposits, but if they intend to do so, it must be completed with plain language and included in the APS.

Aura LLP is Ontario’s leading law firm in the co-ownership of residential and commercial property. We have helped hundreds of clients buy, sell & mortgage their properties. Contact us to learn more about how we can help you.