A recent decision of the British Columbia Court of Appeal,
released February 5, 2013, has held that where a buyer has paid a
deposit with respect to the purchase of real property and then
subsequently fails to complete the transaction, the deposit will be
forfeited by the buyer without the seller needing to prove damages
provided the contract states that the deposit will be forfeited
"on account of damages."
In Tang v Zhang,1 the sellers entered into a
standard form contract used by the Greater Vancouver Real Estate
Board to sell a residential property for $2,030,000. The contract
contained the following provision:
"TIME: Time will be of the essence hereof, and unless the
balance of the cash payment is paid and such formal agreement to
pay the balance as may be necessary is entered into on or before
the Completion Date, the Seller may, at the Seller's option,
terminate this Contract, and, in such event, the amount paid by
the Buyer will be absolutely forfeited to the Seller in accordance
with the Real Estate Services Act, on account of damages,
without prejudice to the Seller's other remedies."
The buyer paid a deposit of $100,000 to the real estate agent
but then failed to complete when required. The sellers took the
position that the $100,000 deposit became absolutely forfeited to
them on account of damages, without prejudice to their other
remedies and demanded that the buyer consent to the real estate
agent's release of the deposit to them. The seller was
subsequently able to sell the property to a third party at a higher
price, with the result that they did not suffer any (pecuniary)
In deciding whether the deposit was "non-refundable and
forfeited without proof of damages," the court followed
previous authority supporting the proposition that "the
interpretation of whether a deposit clause is refundable or
non-refundable depends on the specific wording of the contract of
purchase and sale." However, when interpreting a clause in an
agreement, it is not sufficient to look only at the wording of the
clause in order to decide on its meaning and application; instead
the clause must be examined in its place in the agreement as a
whole. Further, the agreement as a whole, and the clause in
particular, must be examined in the context of the factual matrix
which gave rise to the agreement and against which the agreement
and the clause was intended to operate. With respect to the case at
hand, the court found that in the absence of a manifest contrary
intention, the words used in the document must be construed in
light of their meaning at common law.
In Howe v Smith2, the English Court of
Appeal found that a deposit is a guarantee that the contract should
be performed. This was based on the fact that if the sale proceeds,
the deposit would be applied towards the purchase price, however,
in the event the purchasers default on their obligation to
complete, the deposit is forfeited. In this way, a deposit is not
merely a part payment of the purchase price, but is also an
intention to bind the parties; by creating a fear of its
forfeiture, the deposit instills a motive in the buyer to perform
the rest of the contract. This line of reasoning has been adopted
by the Supreme Court of Canada and remains the seminal authority on
deposits in the context of real estate transactions.
Based on the foregoing, the court found that although the phrase
"on account of" is sometimes used in place of
"because of" and can be limiting in nature, in the
context of a standard form legal document, the phrase is intended
to mean that in any action by a vendor to recover damages against a
defaulting purchaser for breach of a contract, the amount of the
deposit would be counted towards such damages. Essentially, the
court found that the purpose of the phrase is to prevent double
recovery if damages are proven, not to require proof of damages
before recovery. This is consistent with the principle that the
nature of the deposit is a guarantee of performance in place to
encourage contracting parties to complete their contracts in
accordance with their terms. As such, purchaser's counsel and
real estate agents should ensure their clients are aware of the
risks in losing their deposit should they fail to complete the
purchase of a residential property, and ensure that the conditions
precedents contained in the contract adequately protect the
purchaser so that they are able to walk away from a deal should the
1 Tang v Zhang, 2013 BCCA 52.
2 Howe v Smith, (1884) 27 Ch. D. 89.
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
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