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What Happens to Deposits on Termination of Agreement of Purchase and Sale? - Canada



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Generally, the deposit a buyer puts down in respect of an agreement of purchase and sale is only released by the listing brokerage in very limited circumstances.

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice on your agreement of purchase and sale or on the deposit specifically, you should seek professional assistance.

Generally, the deposit a buyer puts down in respect of an agreement of purchase and sale is only released by the listing brokerage in very limited circumstances, including:

* performance and completion of the Agreement of Purchase and Sale;
* a term or condition concerning the deposit in the Agreement of Purchase and Sale;
* a mutual release signed by all the parties; or
* court action concerning the deposit leading to a judgment.

If the Agreement of Purchase and Sale is silent on specifically what happens to the deposit on termination, courts will generally take the view that, if the buyer defaults, then the deposit is forfeited to the seller. If the seller defaults under the agreement, however, the deposit is returned to the purchaser (unless the agreement says otherwise). Finally, if the agreement is frustrated because of some event or condition that arises beyond the control of the buyer or seller, then the purchaser is entitled to the return of his or her deposit (unless the agreement says otherwise).

Where the purchaser defaults, there is no requirement for the seller to prove damages. This means that, even in the case where the seller resells at a purchase price that is high enough to compensate for any loss from the first sale, the seller may nevertheless retain the deposit.

Whether a Court will return a deposit to a defaulting purchaser depends on a three-part test – all of which must be satisfied in favor of the purchaser for the deposit to be returned:

* Was the conduct of the purchaser reasonable in the circumstances?
* Was the purpose of the deposit to secure the payment of the purchase price?
* Was there a substantial disparity between the value of the property forfeited and the damage caused to the seller by the breach?

In Gajasinghe v. Dewar, 2007 CarswellOnt 5738, the Ontario Superior Court of Justice applied this three part test and refused to return a $20,000 deposit to the defaulting purchaser. Although the Court found that the purpose of that deposit was to secure the purchase price and that there was a substantial disparity between the amount of the deposit and the amount of damages suffered by the seller, the purchaser’s conduct was not reasonable. Specifically, the Court found that the purchaser’s actions were “indicative not of a purchaser who was ready and willing to close but rather of one who was searching for an excuse not to close”.

Generally, the deposit is only released by the listing brokerage in very limited circumstances, including:

* performance and completion of the Agreement of Purchase and Sale;
* a term or condition concerning the deposit in the Agreement of Purchase and Sale;
* a mutual release signed by all the parties; or
* court action concerning the deposit leading to a judgment.

If the Agreement of Purchase and Sale is silent on specifically what happens to the deposit on termination, courts will generally take the view that, if the buyer defaults, then the deposit is forfeited to the seller. If the seller defaults under the agreement, however, the deposit is returned to the purchaser (unless the agreement says otherwise). Finally, if the agreement is frustrated because of some event or condition that arises beyond the control of the buyer or seller, then the purchaser is entitled to the return of his or her deposit (unless the agreement says otherwise).

Where the purchaser defaults, there is no requirement for the seller to prove damages. This means that, even in the case where the seller resells at a purchase price that is high enough to compensate for any loss from the first sale, the seller may nevertheless retain the deposit.

Whether a Court will return a deposit to a defaulting purchaser depends on a three-part test – all of which must be satisfied in favour of the purchaser for the deposit to be returned:

* Was the conduct of the purchaser reasonable in the circumstances?
* Was the purpose of the deposit to secure the payment of the purchase price?
* Was there a substantial disparity between the value of the property forfeited and the damage caused to the seller by the breach?

In Gajasinghe v. Dewar, 2007 CarswellOnt 5738, the Ontario Superior Court of Justice applied this three part test and refused to return a $20,000 deposit to the defaulting purchaser. Although the Court found that the purpose of that deposit was to secure the purchase price and that there was a substantial disparity between the amount of the deposit and the amount of damages suffered by the seller, the purchaser’s conduct was not reasonable. Specifically, the Court found that the purchaser’s actions were “indicative not of a purchaser who was ready and willing to close but rather of one who was searching for an excuse not to close”.

ABOUT THE AUTHOR: Michael Carabash, B.A., LL.B., M.B.A.
Dynamic Lawyers Ltd. was founded by Michael Carabash, a Toronto business lawyer with Carabash Law. Virtually everyone has a wide range of legal issues they need help with - such as writing a will, fighting a traffic ticket, buying or selling real estate, writing a contract for services, reviewing a lease agreement, having documents notarized or commissioned, dealing with a motor vehicle accident, etc. Michael wanted ordinary people in need of common legal services to be able to conveniently and cost-effectively get answers and quotes from local lawyers. At the same time, he also wanted lawyers to be able to market their services directly and effectively to the public.

Copyright Michael Carabash Attorney
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.



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