The Buyer Can’t Close. What Happens to the Deposit?

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The Buyer Can’t Close. What Happens to the Deposit?

Recently, the Ontario Provincial Government announced their intention to pass legislation requiring all non-residents of Canada to pay an additional tax on property purchased within Ontario. The tax is to be 15% of the purchase price. While the legislation has not yet been passed, the government intends to retroactively enforce it. This means, it will apply to all agreements of purchase and sale entered into by non-residents, on or after April 21, 2017.  Understandably, this announcement has buyers and sellers alike anxious as to how it may affect the real estate market. Sellers in particular are asking: What happens to the buyer’s deposit if they can’t complete the purchase of my property?

As the seller, are you entitled to the deposit outright? Do you need to sue the buyer in order to recover the deposit? Do you attempt to negotiate with the delinquent buyer over releasing all or part of the deposit? This paper will discuss the possible answers to those questions.

Reviewing the Law: Don’t expect to get rich
The civil legal system is not a mechanism for enrichment. That is, don’t expect to “get rich” when suing an individual. The civil legal system is designed to compensate individuals for loss/damages they may have suffered, not enrich them.

This principle applies equally to all situations where sellers and buyers are arguing over who is entitled to the deposit. The question therefore in these situations is not “who is entitled to the deposit”, but rather, “which of the two parties has suffered a loss and requires compensation?”. Keep this in mind as you read on.

You’ve just signed an agreement of purchase and sale, what happens with the buyer’s deposit?
When a seller has signed a listing agreement with a Real Estate Broker, the buyer’s deposit will be paid into the seller’s Real Estate Broker’s Trust Account. Following which, the deposit can only be transferred out of the Real Estate Broker’s Trust Account, in one of the following situations:

  1. the purchase/sale is completed;
  2. the buyer and seller both provide unanimous direction to the Real Estate Broker specifying as to whom the deposit is to be paid; or
  3. a Court orders that the deposit be paid to one or both of the parties.

The same principles apply in situations of a private purchase where the deposit has been paid to the seller’s lawyer, in Trust.

The buyer has refused to complete the purchase, is the seller entitled to reclaim the deposit outright?
The starting point to answering this question is: What does the contract say?

Nearly all real estate agreements are completed on an OREA (Ontario Real Estate Association) form of agreement of purchase and sale, so we will begin there.

Every OREA form has the following section pertaining to the buyer’s deposit:
“[The] buyer submits ($xx,xxx.xx), upon acceptance by negotiable cheque payable to [the] “deposit Holder” to be held in trust pending completion or other termination of this Agreement and to be credited towards the Purchase Price on Completion.”

None of the other provisions in the standard OREA form address the situation of what happens to a buyer’s deposit if he or she is unable or unwilling to complete the purchase.  If the two parties wish, they may insert an additional provision into a schedule to the agreement, setting out the terms confirming to whom the deposit is to be paid upon the buyer defaulting on the purchase. Such provisions are typically rejected by buyers, as they do not want to risk suffering an immediate loss of their deposit, when the reason for their failure to complete the transaction, may be in dispute.

Unless both the seller and buyer are able to agree to what is to happen with the deposit in the event of the buyer defaulting, the Real Estate Broker/lawyer shall be restricted from releasing the deposit to either party. Where the parties are unable to come to an agreement with respect to what is to happen with the deposit, a Court order must be sought to determine who is entitled to the deposit. At this point, each party will be burdened with proving why the deposit should be released to them, as opposed to the other party. The successful party will likely be the party who is able to prove he or she would suffer a loss if the deposit were not paid to them.

The buyer has defaulted in the purchase of my property, what do I do?
Where a buyer has failed to complete a purchase, the seller has a duty to mitigate his or her damages. Mitigation in this case means the seller must re-sell his or her property. Once a sale to a new buyer has been completed, the seller can calculate what loss he or she has suffered. The loss suffered by a seller is typically the difference between the originally agreed upon price with the former buyer and the purchase price of the new agreement to sell his or her property.

If upon reselling the property, the seller obtains a greater price then what was agreed to with the delinquent buyer, then the seller has arguably suffered no loss. While this does not automatically disentitle the seller to the deposit, he or she will have a difficult time reclaiming any amount from the delinquent buyer, the deposit included. Also of note is that in this situation, the buyer is also not automatically entitled to recoup his or her deposit. The deposit shall continue to remain with the Real Estate Broker/lawyer pending an agreement between the parties or a Court Order.

What happens if the seller chooses not to re-sell the property after the buyer is unable or unwilling to complete the purchase?
Where a seller chooses not to re-sell his or her property following a buyer defaulting on the purchase, then the seller has opted not to mitigate his or her loss. Where a seller has chosen not to mitigate his or her loss, then he or she will once again, have a difficult time making an argument for claiming the deposit or any other amount, as such loss amount would be purely speculative. However, this too, does not automatically entitle either party to the deposit. As described above, the deposit shall continue to remain with the Real Estate Broker, pending settlement or a Court order.

Take-away points
You as the reader should take away the following points from this paper:

  1. Unless expressly provided for in the Agreement, there is no guarantee that a seller is entitled to the deposit in the event a buyer cannot complete the purchase.
  1. Where a buyer is unable to complete a purchase, and the parties cannot agree on what is to happen with deposit, then it shall remain in the Real Estate Broker’s/lawyer’s Trust Account, pending an agreement between the parties or a Court Order.
  1. Where a buyer is unable to complete the transaction, the seller is required to mitigate his or her damages by attempting to resell the property.
  1. Where the seller resells his or her property for less than the originally agreed to purchase price, the seller likely has a claim against part or all of the deposit for his or her total loss.
  1. Where the seller resells his or her property for more than the originally agreed to purchase price, unless the seller can prove that he or she has suffered some other form of damages (loss), then he or she arguably has no right to the deposit or any other monetary award.
  1. Where the seller chooses not to sell his or her property, then the seller has failed to mitigate his or her damages and would likely have a difficult time proving entitlement to the deposit or any other monetary award.

This paper is not meant to serve as a substitute for legal advice. Every situation is different. You as a seller or buyer should consult a lawyer to obtain legal advice if faced with a situation where the other party has or is threatening to breach the Agreement of Purchase and Sale.

Written by:
Keith A. Nichols, Nichols Law Professional Corporation
Tel: (905) 294 7780  Email: keith@markhamlaw.com

 

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