Can a Pre-Incorporation Contract Prevent the Forfeiture of a Deposit on the Failed Closing of a Property?

Gilbertson Davis LLPCommercial Contracts, Real Estate | Developers, Real Estate Litigation0 Comments

In Benedetto v. 2453912 Ontario Inc., the Ontario Court of Appeal considered whether a pre-incorporation contract could prevent the forfeiture of a deposit provided pursuant to an agreement of purchase of sale of real property.

In this case, the purchaser signed an agreement for purchase and sale of real property, indicating that he was signing as a buyer “in trust for a company to be incorporated without any personal liabilities”. The purchaser then provided $100,000.00 as the deposit to secure the purchase of the property. The purchaser subsequently advised that he would not be closing on the transaction and sought the return of the deposit. The vendor refused and commenced civil proceedings resulting in a summary judgment motion, which was held in favour of the vendor.

The Ontario Court of Appeal upheld the findings of the lower court and indicated that:

A forfeited deposit does not constitute damages for breach of contract but stands as a security for the performance of the contract. A purchaser’s obligations under a contract of purchase and sale are thus distinct from the obligation incurred by the payer of the deposit. An implied term of a deposit is that on the breach of the contract by the purchaser (or, in the case of a pre-incorporation contract, by the promoter on behalf of the intended purchaser), the deposit is forfeited to the vendor.[1]

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[1] Benedetto v. 2453912 Ontario Inc. 2019 ONCA 149 at para 14.

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