Canada: What Happens To The Deposit When A Real Estate Transaction Doesn't Close?

It is routine in real estate transactions for a seller to provide a deposit to the buyer as a 'guarantee,' serving to incentivize the completion of the sale. But what happens to a deposit if the sale falls through, further, what if it is not the buyer's fault for the sale failing to be completed?

In the event, an agreement of purchase and sale is "repudiated"–meaning one party chooses not to fulfill their obligations under the contract–the determination of who is entitled to receive the deposit will usually depend on which party is at fault.

If Buyer is at Fault:

Deposits typically are provided as security for the buyer's performance of a contract, thus where a sale has fallen through and the buyer is at fault, the seller is presumptively entitled to keep the deposit as compensation for their lost opportunity.

In Azzarello v. Shawqi the Ontario Court of Appeal stated "[it] is well-established by case law that when a purchaser repudiates the agreement and fails to close the transaction, the deposit is forfeited, without proof of any damage suffered by the vendor".¹

Even if an agreement does not explicitly state what is to happen to the deposit if the transaction fails, the law will presume that the deposit is forfeited by the at-fault buyer unless there is a basis to rebut this presumption.

If Seller is at Fault:

As is provided in most standard agreements of purchase and sale, where a seller is at fault for a transaction not closing, the buyer will be entitled to have their deposit returned to them absent exceptional circumstances,

In Kalis v. Pepper, the Ontario Superior Court was tasked with determining which party in a failed home purchase was entitled to keep the deposit. Ultimately, the deposit was returned to the buyer due to a lack of clear evidence that the buyer has repudiated the agreement.²

Exceptions to the Presumptive Rule:

While the above assumptions apply when determining who gets to keep a deposit in a failed real estate transaction, the default outcome may be overridden in some circumstances. If parties have specifically negotiated an alternative outcome for what will happen to the deposit in the event of a breach, and it is reflected in their agreement of purchase and sale, then courts will often respect that clause.

Additionally, the courts have the discretion to displace the presumption that the non-breaching party will be entitled to the deposit. Section 98 of Courts of Justice Act provides "[a] court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise are considered just".³ The court has exercised this discretion in circumstances where the amount of the deposit is disproportionately larger than the harm suffered as a result of the transaction failing, or in instances of unconscionability (where the agreement is the result of substantial unfairness and inequality of bargaining power).⁴

For example, in Lucas et al v 1858793 ON the court ruled that the buyer did not have to forfeit its $90,000 deposit on the purchase of a condo unit because that amount was "grossly disproportionate to the harm if any, that the [seller] suffered".⁵ Further, the Application judge felt the seller had only used the breach of the contract (allowing a friend to live in the unit for free – which the seller claimed was leasing the unit without their consent, contrary to their agreement) as an excuse to terminate the agreement before closing and keep the deposit.

Determining which party is "at fault" depends on the facts of each transaction and the steps taken by the parties leading up to closing. If you're having a dispute over a deposit on a purchase, or if you were involved in a failed real estate transaction, please contact Graeme Oddy at (416) 446-5810 or Graeme.Oddy@devrylaw.ca for more information.

This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.

This blog was co-authored by Chloe Carr*

Footnotes

1 Azzarello v Shawqi, 2019 ONCA 820 at para 45.

2 Kalis v Pepper, 2015 ONSC 453 at paras 13-14.

3 Courts of Justice Act, RSO 1990, c C 43, s98.

4 Uber v Heller, 2020 SCC 16.

5 Lucas et al v 1858793 Ontario Inc. o/a Howard Park et al, 2020 ONSC 964 at para 55.

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.