Many home buyers do not see a real estate lawyer until after they have signed an agreement of purchase and sale and paid an initial deposit of tens of thousands of dollars.
It is important to remember that unless the buyers make the purchase conditional (on financing approval, for example), the deal is firm, and the deposit may be kept by the seller if the buyer does not complete the purchase.
The Courts have described the purpose of deposits as providing security for performance of the contract by creating an incentive for the buyer to complete the purchase. If the contract is not performed by the buyer, the forfeiture of the deposit to the seller compensates the seller for having taken the property off the market and the loss of bargaining power from having revealed their selling price to the market.
A seller may keep the buyer’s deposit even if they suffer no damages following the buyer’s breach of contract.
In a recent case, an agreement of purchase and sale was executed for $1,105,000 with a $50,000 deposit paid by the buyers. The purchase was not made conditional on financing. On the date before the scheduled closing, the buyers’ bank advised them it would not advance the necessary mortgage funds therefore the buyers were unable to complete the purchase. Seven days later, the sellers entered into another agreement of purchase and sale to sell their property for $130,000 more. Despite having no damages as a result of the buyers’ breach (and in fact having earned a windfall profit), the court held that the sellers could keep the first buyers’ $50,000 deposit. The court noted that “if purchasers were allowed to reclaim their deposits in a rising real estate market simply because vendors resold their property at a higher price it would eviscerate the very purpose of deposits” (Rahbar v Parvizi, 2023 ONCA 522).
The court does have some discretion to grant relief from forfeiture of a buyers’ deposit in some circumstances, specifically if it the deposit is “out of all proportion” to the damages suffered by the seller, and if it would be unconscionable for the seller to retain the deposit.
The factors that the court will consider when deciding if it would be unconscionable for the seller to keep a buyer’s deposit include:
- Any inequality of bargaining power;
- If there is a substantially unfair bargain;
- The relative sophistication of the parties;
- The existence of bona fide negotiations;
- The nature of the relationship between the parties;
- The gravity of the breach, and;
- The conduct of the parties.
However, relief from forfeiture is an exceptional remedy that must be justified based on compelling facts of the case. The facts in the recent case described above did not justify relief from forfeiture.
If you have questions about your rights or obligations under an agreement of purchase and sale, you are recommended to seek legal advice.