Increasingly, I've had buyers or prospective buyers reach out to me about cancelling their firm agreements of purchase and sale with their builders. Why? Because the majority of these buyers signed their agreements in 2021 or 2022, at the height of the real estate market, and currently we are at a low point in the real estate market and bank appraisals are coming in 20% or 30% lower than the contracted purchase price.
In this situation, the most common questions I am asked are:
- Am I (the buyer) entitled to a return of my deposit?
- If the seller takes my deposit, am I liable for anything further?
- Can I negotiate with the seller to receive a portion of my deposit back?
- Will the seller agree to reduce the purchase price and match the purchase price on the mortgage appraisal?
The answer to all of these questions is "it depends".
In most cases, if the agreement of purchase and sale is firm, the buyer is not entitled to a return of the deposit. By failing to close, the buyer has breached the contract. In this situation, case law confirms that the buyer's deposit is forfeited to the seller.
In addition to the deposit being forfeited automatically, the case law further confirms that the seller is entitled to additional damages which damages are quantified as the difference between the original contract price and the value that the seller is able to resell the property for, at the time of breach.
Where the forfeited deposit exceeds the quantified damages, the buyer MAY be successful in bringing a claim for relief of forfeiture of deposit. Buyers considering a breach of contract are cautioned that the standard for relief of forfeiture is very high and granted in exceptional cases only where there is an unfair bargain or an inequity in bargaining power and where parties have not acted reasonably. A deposit is collected as security for performance of a contract and not necessarily as representative of damages in case of a breach of contract.
Depending on the market and the seller's situation, the seller may be open to negotiation to close the property at a reduced price. A practical seller will consider that it will take time to relist the property and to initiate a proceeding against the buyer to recover damages.
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.
