Forfeiture Of Deposits In Real Estate Transactions – Must The Vendor Prove A Loss?

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The British Columbia Court of Appeal has re-examined the caselaw which deals with the forfeiture of deposits in real estate transactions.
Canada Real Estate and Construction

The British Columbia Court of Appeal has re-examined the caselaw which deals with the forfeiture of deposits in real estate transactions. In Tang v. Zhang1, Madam Justice Newbury found that where a buyer has paid a "deposit" that the contract states is to be forfeited to the seller "on account of damages" and fails to complete a purchase as required, the buyer is effectively repudiating the contract, and in such circumstances, it is not necessary for the vendor to prove that it has suffered a loss in order to retain the deposit.

In this case, the vendors entered into a standard real estate contract to sell a residential property. The buyer paid a deposit of $100,000.00, but failed to complete the transaction. The vendors were successful in finding another buyer and sold the property for a higher price, and thus did not suffer any damages. Nevertheless, the vendors sought to retain the full amount of the deposit, and took the position that the deposit was non-refundable and had been forfeited to them. The buyer sought a return of the deposit, arguing that the vendors had not suffered any damages as a result of its failure to complete the transaction.

Initial Decision

Until recently, the law on forfeiture of deposits has been subject to two conflicting authorities. The first is Williamson Pacific Developments2, where the Court followed the general rule that a deposit is a guarantee of completion, and that it is ordinarily forfeited where the purchaser fails to close the sale. The Court affirmed that the vendor was entitled to the deposit, regardless of damages.

The second is the case of Agosti v. Winter3, where the judge arrived at an opposite result. In that case, the British Columbia Court of Appeal did not accept that the vendors had an unconditional right to the deposit. The Court held that the vendor is entitled to claim the deposit on account of its damages, and only to the extent of those damages.

In this case, as in Agosti, the language of the contract did not state that the deposit was "non-refundable". Accordingly, the trial judge applied Agosti and held that the buyer was entitled to the return of the deposit.

The Decision of the Appeal Court

The vendor appealed and took the position that the deposit was absolutely forfeited even without proof of damages. The respondent buyer argued that the language in the agreement which provided that the deposit was "on account of damages", was limiting language, meaning the deposit was to be applied only towards damages.

The Court decided a true deposit was designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit was generally forfeited by a buyer who repudiated a contract, and was not dependent on proof of damages by the other party. Further, a contractual term that a deposit was to be forfeited "on account of damages" on the buyer's failure to complete did not alter the nature of a deposit but could be construed to mean that if damages were proven the deposit would be applied against them. If no damages were shown, the deposit was nevertheless forfeit. The Court allowed the appeal and concluded that Agosti was no longer good law.

The Court did caution that the question of whether a deposit is forfeited remains a matter of contractual interpretation. Therefore, the exact language in the agreement is critical to the treatment of a deposit in a real estate transaction.

Footnotes

1 2013 BCCA 52

2 1997 BCJ No. 1109

3 2009 BCCA 490

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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