The Importance of a Deposit in a Real Estate Transaction

Wednesday Jan 04th, 2017

This weeks blog focuses on the importance of deposit’s in real estate transactions. The first article considers the purpose of deposit’s, clarifies some common misunderstandings and highlights a case pertaining to what is considered “reasonable action” when attempting to mitigate losses after a failed real estate transaction. The second article focuses on a recent case in Ontario where the court was required to consider whether there was “clear and unequivocal acceptance of an anticipatory breach” which would ultimately determine how the $80,000 deposit would be allocated amongst the parties.


Remedies Available in a Collapsing Real Estate Transaction 

It is important to consider what the purpose is of a “deposit”. Typically, a deposit is money that is paid prior to the completion of a contract to represent the purchaser’s honest interest and intention to complete the real estate transaction. After entering into a binding agreement of purchase and sale there is still the possibility for the purchaser or vendor to default on the transaction. Commonly, the default will occur as a result of the purchaser wishing to back out of the deal, leaving the vendor to once again look for a purchaser and claim damages that resulted by the breach.
The deposit is not given much thought in most real estate transactions. The standard OREA form says this: “The Purchaser submits, upon acceptance/herewith/as otherwise described in this Agreement, $______.00 by negotiable cheque payable to ______ ‘Deposit Holder’ to be held in trust pending completion or other termination of this Agreement and to be credited toward the Purchase Price on completion.” This clause does not address what happens if either party breaches the agreement.
If no special clauses are inserted, there is no language to address what should happen if either party breaches the agreement after the conditions are waived and the transaction is considered firm by both sides.
Many people misunderstand the terms surrounding a deposit and often assume that the deposit is automatically lost once a breach occurs, or that the deposit represents the limit on what damages can be recovered by the vendor from the purchaser. If the parties do not address this possibility when the agreement is drafted, the parties are left to either negotiate a settlement to allow for the deposit to be released in whole or in part to one of the parties or for the wronged party to bring a court action and have a judge decide. If the parties litigate the matter the deposit will most likely be either held by the deposit holder or paid into court. This could tie up the deposit for a purchaser and not allow them to move on until this matter is settled.
I will discuss what a court will consider and the obligation for the wronged party to mitigate their losses below but first this can be avoided if the parties turn their mind to this possibility at the outset.
The options available to address what will happen with the deposit if the agreement is terminated are:
  • Rely upon the standard language which does not address it directly and leave it to be negotiated or litigated if and when required.
  • Insert language to make it clear the vendor will be retaining the deposit in full and their right to an action if there are additional damages. “Upon termination by the purchaser, for any reason, after the conditions have been waived the deposit shall be non-refundable, subject to the seller reserving its right to take action for full recovery of any damages incurred.”
  • Insert language that makes it clear the vendor will retain the deposit as full satisfaction for the breach. “Upon termination by the purchaser for any reason after the conditions have been waived the deposit shall be absolutely forfeited by way of liquidated damages.” This would allow the vendor to keep the deposit even if they did not suffer any damages. The vendor will also most likely be limited to that amount even if the damages incurred are more.
Regardless of how clear you attempt to draft the language in the agreement it often comes down to a negotiation between the parties. In most cases whether the deposit is in a lawyer’s account or the broker’s account, the deposit holder will require a signed mutual release to ensure all parties are agreeable to the money being released.
When the parties are left to resort to the courts to reach a resolution the judge will generally try to put the wronged party in the position it would have been had the breach not occurred. The items that will qualify for damages include difference in purchase price obtained through further sale, closing costs on the abandoned purchase, rental costs, interest costs, real estate commission etc. There is an obligation imposed on everyone, however, to take all reasonable actions to mitigate their losses. In most cases this means to relist the property and take all reasonable actions to obtain the best price.
A 2010 case out of British Columbia, Hargreaves v. Brar, 2010 BCSC 538, highlights what will be considered unreasonable. When a purchaser was unable to close on the date agreed upon, because the purchaser’s property had not sold, the purchaser asked for an extension. The vendor needed the sale proceeds to close on the vendor’s purchase and denied the request. The vendor took the first step to mitigating her losses and relisted the property. The original purchaser submitted a new offer at the same price with a later closing date. The vendor did not accept the new offer from the original purchaser but rather accepted a different offer at a significantly lower price from a new purchaser. The vendor sought damages including the difference in the purchase price in the original offer and the price that was accepted from the new purchaser. The court found that it would have been more reasonable for the vendor to have renegotiated her deal with the first purchaser. As a result of her failure to act reasonably the original purchaser was not required to pay anything to the vendor; the vendor’s claim was dismissed. The full case can be accessed by clicking here:

Go Big or Go Home?
The Importance of the Size of Deposit

In the case of Bianchini v. 1670948 Ontario Inc., 2016 ONSC 7367 the Ontario Superior Court of Justice was required to consider whether or not clear and unequivocal acceptance of an anticipatory breach by the purchaser was established by the vendor. This would determine how the $80,000 deposit on the transaction would be allocated. In the end, the court provided that acceptance of the breach had occurred and the deposit was ordered to be paid as damages to the vendor.

This case concerns a real estate transaction in which an initial deposit of $10,000 was paid to the purchaser, with an additional $70,000 deposit paid after the financing condition was waived in order to make the agreement firm and binding. The agreement firmed up November 14, 2012 and it was agreed that closing would take place on April 3, 2013.

In the afternoon on the closing date, the purchaser’s lawyer emailed the vendor’s lawyer stating that “[o]ur client has not yet received confirmation of the financing and will not be able to close today.” The vendor’s lawyer responded shortly thereafter with a letter indicating that his clients were “ready willing and able to complete this transaction and are not willing to extend closing. It is therefore our position that your client is in breach of the Agreement of Purchase and Sale, the deposits are forfeited and our clients reserve the right to sue for any additional damages”.

The parties did not dispute that the email notification from the purchaser’s lawyer was an anticipatory breach of the agreement. However, there was a dispute as to whether or not the contents of the letter from the vendor’s lawyer was an unequivocal termination of the transaction.

One of the contextual factors that surrounded this dispute was the fact that the real estate agent claimed that the purchaser had indicated, on the day of closing, that she was willing to extend the closing date but would not accept a vendor take-back mortgage. Three days after the closing date, the realtor stated in his affidavit that the purchaser contacted him and indicated that she was prepared to wait two weeks in order to facilitate closing. The purchaser, however, claimed that she was only willing to accept a new agreement with a new closing date on condition that evidence of financing could be provided, as she was under the impression that the previous transaction had been terminated. These alleged events would have an impact on whether clear and unequivocal acceptance was established.

Position of the Parties
The vendor submits that there was clear and unequivocal acceptance of the anticipatory breach; thus the agreement was terminated and they were entitled to damages.

The purchaser submits that the email from the vendor’s lawyer on the closing date was not a clear or unequivocal indication that the agreement was at an end. Further, it was argued that the discussions that had occurred between the real estate agent and the vendor resulted in the acceptance of the anticipatory breach being less than unequivocal.

The main issue in this case was summarized by the court as “whether or not the vendor gave clear and unequivocal acceptance of the purchaser’s anticipatory breach.”  Deciding this issue would determine whether or not the vendor received the $80,000 deposit as damages or whether it would be returned to the purchaser.

Further, the court was required to consider whether the actions of the vendor had the effect of negating/ contradicting her lawyer’s letter “to the point where acceptance of the anticipatory breach is less than clear and unequivocal.”

At the outset of the court’s analysis, it was stated that “the law is clear that where a vendor has committed an anticipatory breach, tender is not required, the purchaser is relieved of his/her obligations under the contract and entitled to damages.” The court then went on to consider the issues.

The court stated that the letter from the vendor’s lawyer on the closing date provided clear acceptance of the anticipatory breach and further indicated that the deal would not be extended and that damages would be sought. This letter was deemed to have finalized the vendor’s position despite the alleged discussions that occurred between the vendor and the real estate agent on the day of closing and three days after.

Another important point noted by the court was that the realtor was acting on both sides of this deal. In the court’s opinion, this affected the agents credibility as he had motive to push for the completion of the transaction between the two parties. Due to the ambiguity surrounding the discussions that took place between the agent and the vendor, and the credibility issues, the court determined that this factor would not create a waiver or result in the letter as being less than unequivocal.

Overall, the court held that there was indeed clear and unequivocal acceptance by the vendor of the anticipatory breach by the purchaser. As such, the $80,000 deposit was ordered to be paid to the vendor as damages. Additionally, the purchaser was required to pay $15,000 in costs.

The key take away from this case for realtors and clients to understand is that the size of the deposit is a very important aspect to consider at the outset of a transaction. This will have an impact on the amount of damages that can be claimed in the event of a breach. Generally speaking, a larger deposit is considered desirable, especially in a hot housing market such as Barrie where the size of the deposit may increase the likliehood of the acceptance of the offer and will also indicate a stronger level of commitment from the purchaser. However, in the event of a breach, this can have significant implications on the defaulting party.
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Newsletter prepared by Shari Elliott & Hayley Valleau
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