What happens to your deposit if you cannot close?
Typically, an offer to purchase a property comes with a contractual promise to pay a deposit upon the seller's acceptance of the offer. In Ottawa, the average deposit for a resale residential home is generally between one to two percent of the purchase price. I often advise sellers to aim for as large a deposit as possible. A higher deposit provides some protection in case a deal falls through due to no fault of the seller.
Can the Sellers Keep the Entire Deposit?
If a buyer cannot close the transaction on the agreed-upon closing day, the deposit is generally forfeited to the seller. In addition, sellers can sue for damages, which may include the carrying costs of the home. However, buyers can petition the court for relief from forfeiture if they believe that losing all or part of the deposit is unfair.
The Ontario Court of Appeal has outlined that, for purchasers to be granted relief from forfeiture, they must demonstrate that the forfeited deposit is disproportionate to the actual damages suffered and that it would be unconscionable for the seller to keep the full amount.
The Court has identified several factors that may suggest unconscionability, including:
Inequality of bargaining power between the parties
The existence of a substantially unfair bargain
The relative sophistication of the parties
Whether there were bona fide negotiations
The nature of the relationship between the parties
The gravity of the breach
The conduct of the parties
Additionally, the Court has stated that a disproportionately large deposit, by itself, could be considered unconscionable.
Examples from Case Law
Despite these guidelines, case law has shown that deposit amounts often do not meet the threshold for unconscionability, even if they seem high to the average person. Below are some examples where courts have upheld the forfeiture of significant deposit amounts:
Varajao v. Azish, 2015 ONCA 218 – A $75,000 deposit on a $2.9 million purchase (2.5%) was forfeited.
Mikhalenia v. Drakhshan, 2015 ONSC 1048 – A $100,000 deposit on a $1.3 million purchase (7.7%) was forfeited.
Redstone Enterprises Ltd. v. Simple Technologies Inc., 2017 ONCA 282 – A $750,000 deposit on a $10.225 million purchase (7.3%) was forfeited.
A Recent Example: Sinha v. Shabestari, 2018 O.J. No. 192
In the recent Toronto case of Sinha v. Shabestari, the court dealt with the issue of deposit forfeiture in a situation where the buyers defaulted. The buyers had put down a $60,000 deposit on a $1.202 million home (approximately 5%). However, they were unable to close due to financing issues. The sellers kept the deposit and resold the property for $1.273 million, a $71,000 increase over the original price.
The buyers argued that it was unfair for the sellers to keep the deposit, citing factors such as their limited English proficiency, being pressured into making an unconditional offer, and their real estate agent’s handling of the deal. However, the court rejected these arguments and ruled that the sellers could retain the deposit. The court also confirmed that the fact the property resold for a higher price was not evidence of unconscionability. Furthermore, the deposit amount was not considered disproportionately large.
Advice for Buyers and Sellers
For buyers, the advice is straightforward: try to offer as low a deposit as possible without risking your offer being rejected. For sellers, aim for the highest deposit you can negotiate. A deal can fall apart for many reasons, and a larger deposit gives sellers better protection in such cases.
This blog provides general information and is not intended to replace legal advice from a qualified professional. The examples and situations described are illustrative and not intended to address specific issues. The use of this information does not create a lawyer-client relationship. For legal advice on your specific situation, consult a lawyer before making decisions related to the issues discussed in this blog.
