The recent Ontario Court of Appeal decision in Azzarello v. Shawqi, 2019 ONCA 820, illustrates the purpose of providing a deposit when purchasing real property and under what circumstances a purchaser will lose their deposit or be refunded the deposit if the sale does not go through.
There are some important general principles that purchasers and sellers should be aware of regarding deposits in a real estate transaction:
1) Contemplation Regarding The Deposit In the Contract Is Important
Purchasers and sellers should carefully consider the terms to be included in the purchase and sale agreement regarding the deposit. The contract should be clear about what happens to the deposit in all possible scenarios. In cases where it is not, the courts will look to implied terms in the contract and existing case law which governs how deposits are dealt with.
2) The Reason The Sale Fell Apart Is Important
The reason the transaction failed is critical to an analysis of who is entitled to the deposit. The reasons may lead to the conclusion that other participants in the transaction may be liable for the failed closing such as agents/brokers or real estate lawyers involved in guiding the parties through the transaction. As examples, a closing can fail because critical information was initially withheld regarding the property, such as latent defects or hidden damage, and only came to light shortly before the closing; or if there were clear deficiencies in the contract regarding the description of the property. There can be a myriad of reasons why a real property transaction does not close. All factors surrounding the failed closing are important considerations.
3) The Deposit Is Generally For The Benefit Of The Seller
Generally the rationale for the deposit is to protect the seller in a real estate transaction. By the payment of the deposit, the seller suspends the availability of the property on the open market, it is now held for the purchaser until all of the steps both parties need to take to complete the sale have been taken (usually by the closing date). If for any reason the purchaser does not complete the closing (through no fault on the part of a seller), the deposit is, in most cases, forfeited to the seller. In other words the purchaser loses the deposit. This is so even if the seller is able to subsequently obtain a better offer on the property, or suffers no financial loss on a subsequent sale to another purchaser.
4) If The Seller Fails To Close The Transaction The Deposit Is Returned To The Purchaser
If on the other hand the seller does not complete the sale (through no fault on the part of the purchaser), usually the purchaser will be refunded the deposit. The courts will typically look at: a) whether a contract has been repudiated by either party, in other words – has a party (either the purchaser or seller) by their actions or words walked away from the deal? If so which party and when? If both parties walk away from the deal or for some reason, neither party is able to close the transaction, the purchaser will generally have their deposit returned. If on the other hand it is clear that one party repudiated the contract, and the other party was willing, able and ready to close the deal – the party who was willing to close will retain the deposit.
5) Where a Purchaser Repudiates The Contract They May Be Liable For The Sellers Losses Beyond The Deposit
If a purchaser for some reason is not able to complete the sale (through no fault on the part of the seller), the seller may also have a claim against the purchaser for any losses incurred as a result. The classic example is where market conditions have since changed and the seller is not able to sell the property at the same price. Other examples of such damages or losses include any carrying costs incurred by the seller after the failed transaction, including additional fees incurred to sell the property, staging costs, etc. The typical damages that a seller can recover have been enunciated in the case of Goldstein v. Goldar, 2018 ONSC 608. The courts will of course still expect the seller to act reasonably and diligently in minimizing (or mitigating) the losses. A seller cannot, for example, sell the property for far below market value on the basis that they intend simply to collect the difference from the purchaser. The loss of the deposit on the part of a purchaser who was unable to close a transaction does not prevent a seller from pursuing additional damages from that purchaser.
6) The Deposit Is Credited Against Any Losses Claimed By The Seller Against The Purchaser
The recent Court of Appeal decision in Azzarello v. Shawqi, 2019 ONCA 820, affirms a long line of cases which hold that if a purchaser fails to close a real estate transaction, and the seller pursues the purchaser for any losses, the deposit is credited against such losses. However, it is important to note, that where a purchaser walks away from a sale, through no fault on the part of a seller who is ready, willing and able to close the deal, the purchaser will generally forfeit the deposit. This will be the case regardless of any subsequent loss or gain made by the seller on the sale of the subject property.
Whether you are a purchaser or seller involved in an aborted or failed real estate transaction, it is important to obtain legal advice on what happens to the deposit under the circumstances. The answer will depend on the particular facts of your situation and how the law and contractual terms apply. Deposits are usually held in trust by a third party vendor (often a real estate brokerage involved) until the closing is complete, and in the case of a failed closing, will not be released unless particular steps are taken. In some cases, not until a court order is obtained by one of the parties to the transaction, instructing the brokerage to release the deposit to a specific party.
Whether you are in a dispute over a deposit after an aborted real estate transaction or you are a seller who has suffered losses because of an aborted sale the lawyers at Gilbertson Davis LLP can help.