When a Deal Falls Through, Who Keeps the Deposit?

March 7, 2019

The deposit paid by the buyer for the purchase of real estate in Ontario is only released in the event that the sale goes through, upon mutual release of the parties, court order or due to a specific term in the contract.  

Court Order

In the event that a court order is sought, the buyer will ordinarily have the deposit returned if the seller is in default or if the contract may not be completed, through no fault of the buyer or seller.   Conversely, the buyer will ordinarily forfeit the deposit if the buyer is in default. If the agreement for purchase and sale stipulates what is to happen to the deposit in certain scenarios, then the court will follow the provisions of the contract.

Mutual Release

Anything short of a court order or completion of the sale requires the mutual release of the parties in order for one of the parties to receive the deposit moneys.  If the contract is conditional upon a specific event, such as obtaining a home inspection or obtaining financing, the return of the deposit to the buyer still requires the release from the seller, even if the home inspection was not satisfactory or if financing was not obtained.  Although it is rare, the seller may nevertheless refuse to provide the go ahead to the brokerage to release the deposit to the buyer. In such an event, the parties would be forced to go to court, which at times may cost the parties the same if not more than the deposit amount. If the seller refuses to allow for the release of the deposit, your real estate lawyer may prove to be instrumental in the resolution of the matter.

Deposit Not Paid

What happened if the deposit was never paid?  Because the payment of the deposit does not go to the heart of the contract, the vendor is not entitled to back out of the contract and sell the property to another purchaser in the event of non-payment of the deposit.   It may be worthwhile to speak to your real estate agent or real estate lawyer about drafting a clause, which would make the payment of the deposit an essential term of the contract. If the clause specifically allowed for termination of the contract in the event of non-payment, the vendor would be able to sell to a third party purchaser.   

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