March 16th 2020
The purpose of a deposit in any real estate transaction is to ensure the buyer’s intention to perform the contract. Ordinarily, this amount is applied to the purchase price and is reflected as a credit to the buyer on closing. There are instances where a buyer is able to have the deposit returned to them, such as when there are conditions for financing that are not waived as a mortgage cannot be arranged, or when the buyer discovers a defect of title or material change that puts the contract at an end.
There are countless reasons why a contract may not close even though a deposit was given. In some situations, there is disagreement about whether the buyer is able to walk away and have the deposit returned to them in full. These situations typically require a legal opinion. If the conditions that allow the buyer to exit the contract without penalty have been waived, meaning the deal is ‘firm’, the buyer risks forfeiting the entire deposit to the seller if they cannot close the deal. The buyer is also exposed to additional liability, as the measure of damages is based on the difference between the original purchase price and the lesser amount that the property sold for after the purchaser’s default.
From the perspective of the seller, a decision must be made once the purchaser has indicated they cannot close the deal. Often a buyer will ask for an extension, meaning they are asking for more time to arrange for funds to close the deal. It is important to seek advice from a trusted real estate professional before agreeing to an extension. If it is clear the buyer has or will breach the contract, the seller can request the deposit money be released to them directly. The parties must agree before the money held by the real estate brokerage is released. This is usually done by way of a mutual release, meaning once the deposit money is delivered to the seller, there can be no further claims brought against the buyer. However, if the buyer does not cooperate, the seller may need a court order for the release of deposit funds. The seller will still be entitled to the deposit money even if the property is sold for more than the original contract price. If the parties do not sign a mutual release, and the house is ultimately sold for less than the original contract price, the deposit is treated as part payment for the damages suffered as a result of the loss, and the purchaser is liable for the remaining difference. For a more in-depth discussion of the topic, the recent decision of Azzarello v. Shawqi, 2019 ONCA 820 is informative.
If you are interested in learning more about your rights and obligations in your real estate transaction, contact Liddiard Law today.
Michael Craig Liddiard, BA MA JD | Liddiard Law Professional Corporation | michael@liddiardlaw.ca