Losing your Deposit
Published:
Since April 2017, and the market downturn after Premier Kathleen Wynn’s announcement regarding her plan to cool the hot market, vendors have been increasingly requesting higher deposits with Offers for the purchase of their property. So what happens to the deposit if the transaction falls through? Who gets to keep it?
Deposits are held by the broker for the vendor. The broker, for all practical purposes, will not release the deposit without:
- consent by both parties; or
- a court order.
If a transaction closes, this is not an issue, as both parties consent to the deposit being released to the vendor and it being credited to the purchase price. However, where the transaction falls through, for all practical purposes, it will not be paid out without the buyer and vendor coming to an agreement as to who gets to keep the money (and hence the consent of both parties) or a Judge decides.
So who is entitled to the deposit?
In Sinha v. Shabestari, 2018 ONSC 298, Justice Shaw answers this question by finding the vendor was entitled to keep the $60,000 deposit when the buyers failed to close, even though the vendors had mitigated their damages by re-listing and selling the property in question for $71,000.00 more than the original sale price.
The law regarding deposits is as follows:
- the law is clear a deposit may be forfeited without proof of damages;
- Using the word “deposit” in a contract will imply the payment is intended for forfeiture (the loss or giving up of something as a penalty for wrongdoing) upon the purchaser’s breach unless the agreement expressly sets out that it will not be forfeited;
- Relief from forfeiture will be granted where it is established that the sum is out of all proportion to the losses suffered and it would be unconscionable for the vendor to retain the money;
- The defaulting purchaser has to satisfy a Judge that the requirements for relief from forfeiture have been met.
Therefore, the “test” a Court will use in deciding whether the deposit is forfeit is:
- Was the deposit amount out of proportion to the damages suffered?
- Would it be unconscionable for the vendor to retain the deposit?
So what amount will a Court deem to be proportional? In the following cases, courts found the deposits to be proportional and forfeit:
| Case | Deposit being % of purchase price |
| Sinha v. Shabestari, 2018 | 3.6% |
| Redstone Enterprises Ltd. v. Simple Technologies Inc., 2017 | 7.3% |
| Varajao v. Azish, 2015 | 2.5% |
| Mikhalenia v. Drakhshan, 2015 | 7.6% |
| Tang v. Zhang, 2013 | 4.9% |
| Signal Chemicals Ltd. v. Dew Man Marine Trade Inc., 2011 | 4.5% |
| 350150 Ontario Limited v. 1416134 Ontario Limited, 2008 | 4.8% |
| Hinkson Holdings Ltd. v. Silver Sea Developments Limited Partnership, 2007 | 25% |
| Liu v. Coal Harbour Properties Partnership, 2006 | 20% |
Sinha v Shabestari was decided before Goldstein v Goldar, 2018 ONSC 608. In the latter case Justice Morgan found the purchaser to have breached the APS and found the vendor to be entitled to the difference between the price under the original APS and the price of the new APS, plus carrying costs incurred in mitigating loss and dealing with the purchasers’ breach. The Judge ordered the deposit was to be applied to the damages incurred by the vendor.
The difference between the first and the second case, is that in the first case, the vendor sold the property for more than the original APS, and in the second for less.
In Goldstein v Goldar, no argument seems to have been made that the vendor was entitled to damages plus the deposit. If in Sinha v Shabestari the vendor was entitled to the deposit being forfeited solely for the breach, why should the vendor in Goldsten v Goldar not be entitled to the deposit also?
This disparity needs to be resolved by the Court.
What does this mean for vendors?
Speak to litigation counsel before agreeing to release the deposit back to the breaching purchaser. You might be entitled to both the deposit along with either the increase in the property value, of for damages of the difference between the sale price under the first APS and the second.
What does this mean for purchasers?
Be careful in breaching an APS. You might be on the hook for both the shortfall in sale price and also forgo your deposit. Always speak to ligation counsel first.
The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.
