What happens to your deposit if you cannot close? Do sellers get to keep the entire amount?

by: Robert Pacan

Typically, an offer to purchase a property comes with a contractual promise to pay a deposit on acceptance of the offer by the seller. My anecdotal evidence for average deposit amount in Ottawa for used residential homes is one to two percent of the purchase price. It’s usually recommended that sellers try and get as large of a deposit as possible. This is to protect sellers against deals that go bust through no fault of their own.

Do the sellers get to keep the entire deposit amount?

If a purchaser cannot close on the closing day, the deposit is generally forfeited to the sellers. In addition, the sellers can sue for damages for any losses, such as carrying costs of the home. However, purchasers can ask the court for relief from forfeiture. This remedy is requested when they feel that losing all or some of the deposit amount to the sellers would be unfair. The Ontario Court of Appeal stated in order to obtain relief from forfeiture, purchasers are required to establish that the forfeited sum (the deposit) would be out of proportion to the damages suffered and that it would be unconscionable for the seller to retain the money.[1]

The Court of Appeal also laid out some factors that could give rise to unconscionability, such as inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties.[2] Furthermore, the Court stated that a disproportionately large deposit, without more, could be found to be unconscionable.

Case law has shown that what may appear to be a high deposit amount may itself not meet the threshold for unconscionability. The following deposit amounts were forfeited and allowed to be kept by the sellers:

Deposit amount – $75,000 on $2.9 million purchase = 2.5% (Varajao v. Azish, 2015 ONCA 218)

Deposit amount – $100,000 on $1.3 million purchase = 7.7% (Mikhalenia v. Drakhshan, 2015 ONSC 1048)

Deposit amount – $750,000 on $10.225 million purchase – 7.3% (Redstone Enterprises Ltd. v. Simple Technologies Inc., 2017 ONCA 282)

Another example of this is the recent Toronto case of Sinha v. Shabestari, [2018] O.J. No. 192. It dealt with the same issue of what to do with the deposit on a purchaser’s default. The facts were as follows: the buyers put down $60,000 on a $1.202 million purchase. This translated to about a 5% deposit in relation to the purchase price. The buyers were unable to close because they could not arrange financing. The sellers kept the deposit and resold their property at $1.273 million, or $71,000 more than the original sale price. Seems like a windfall right? Original buyers thought so as well and sued to get their deposit of $60,000 back, or at least attempt to get it reduced.

In their claim for relief of forfeiture, they stated that it would be unconscionable for the sellers to keep their deposit due to several factors, such as their limited understanding of English, being pressured to make an unconditional offer, and their agent’s handling of the transaction. The court did not accept their arguments and allowed the sellers to keep the deposit. Additionally, the Court confirmed that just because the property was resold for a greater price than the original sale price, that itself was not evidence of unconscionability. Moreover, the Court found that the deposit amount was not disproportionately large to be considered unconscionable.

In summary, as purchaser or seller, be mindful of the deposit amount when presenting or accepting offers. While you may not think much of it at the outset of the deal, it will be an important factor on a potential purchaser default on closing.

This blog contains strictly general information and is not intended to replace advice from a qualified legal professional. The contents of this blog are therefore not to be relied upon as such. Any facts or examples used are for illustrative purposes only and not intended to address specific incidents or problems. Use of this information does not constitute a lawyer-client relationship. Retain a lawyer for legal advice prior to making any decisions referenced in this blog.

[1] Varajao v. Azish, 2015 ONCA 218.

[2] Redstone Enterprises Ltd. v. Simple Technologies Inc., 2017 ONCA 282 at para. 30.