The B.C. Court of Appeal recently resolved a conflict between
two of its previous decisions, clarifying the effect of a standard
provision in real estate contracts that many of the Province's
real estate professionals may take for granted. The issue is
whether a seller has the right to keep a deposit even if it suffers
no damage as a result of a purchaser's failure to complete, and
the Court of Appeal's recent uncertainty on this issue has
caused confusion about many of the standard form real estate
contracts currently in use in the Province.
In the most recent decision, Tang v. Zhang, 2013, BCCA
52, the court was asked whether the Greater Vancouver Real Estate
Board's standard form Contract of Purchase and Sale gives a
seller the unconditional right to keep a deposit when a buyer's
breach of contract has not caused the seller to suffer clear
monetary losses. Specifically at issue was the "time of the
essence" clause, which states that if the buyer fails to
complete the purchase, the seller can terminate the contract, and
the amount paid by the buyer as a deposit "will be absolutely
forfeited to the seller... on account of damages,
without prejudice to the seller's other remedies."
Importantly, when the buyer in Tang failed to complete
the purchase, the seller put the disputed property back on the
market and managed to sell it to a third party for a higher price.
In the meantime, the seller commenced its action in B.C. Supreme
Court, seeking a declaration that the deposit became
"absolutely forfeited" following the buyer's failure
to complete, and an order that the deposit be released by the agent
holding it. Following a previous decision of the B.C. Court of
Appeal, Agnosti v. Winter, 2009 BCCA 490, the trial judge
held that the deposit provision did not give the seller an
unconditional right to the full deposit, but instead created the
right to claim for proven damages out of the
deposit funds. Since the sellers did not suffer clear monetary
losses, the trial judge held that the buyer was entitled to the
return of the deposit.
The Court of Appeal reversed that decision, and found that in
the absence of a clear intention to the contrary, deposit payments
are held as a guarantee of a purchaser's
performance and cannot be recovered by that same purchaser
following his or her breach of contract. Holding that
Agnosti was wrongly decided and should no longer be
followed, the court noted that contractual provisions that state a
deposit will be forfeited "on account of damages" do not
change the traditional nature of deposits as a guarantee of
performance, but instead mean that if damages can be proven, the
deposit will be applied against them. However, barring a clear
intention to the contrary, if damages cannot be proven, the deposit
will still be forfeited to the seller if the buyer fails to
complete the purchase.
Considering the importance of deposit provisions in real estate
contracts, the mixed messages sent by the Bench on this issue in
recent years have raised concerns about contracts currently in use
in the Province. With the Court of Appeal finally resolving the
conflict between its previous decisions, real estate professionals
should consider having their standard form contracts reviewed by
legal counsel to ensure that the deposit provisions they contain
will achieve their intended objectives.
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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