Failure to Pay Deposits on Real Estate Transactions in Ontario:
In recent months, there has been a noticeable uptick in situations where a purchaser, after having their offer to buy real estate accepted, opts not to pay the deposit and attempts to withdraw from the transaction. Whether due to feelings of regret or because a purchaser submits offers on multiple properties and only proceeds with one, the typical argument presented by the purchaser is that "if the deposit wasn't paid, there is no binding agreement."
However, prospective buyers should be cautious, as this assertion is incorrect.
Deposit is not Consideration:
For an offer to be legally binding, there usually needs to be consideration. Some might assume that no deposit means no consideration, but this is a misconception. The deposit itself isn't what establishes the consideration necessary for a binding real estate agreement. Instead, it's the promise to transfer the property from seller to buyer in exchange for the buyer's commitment to pay the purchase price.
Even if the deposit were deemed necessary for consideration, it wouldn't aid a buyer significantly. Many real estate agreements are executed under seal, as seen in standard forms such as the Agreement of Purchase and Sale published by OREA. Under seal, an agreement doesn't require consideration to be legally binding.
Failure to Meet Deposit Obligations Constitutes a Material Breach
When a buyer unilaterally decides not to adhere to the terms of the agreement by failing to pay the deposit, they are in breach of contract. This breach affords the seller certain rights. The seller can opt to cancel the agreement, pursue specific performance (i.e., compel the buyer to complete the transaction through a court order), or seek damages. Alternatively, the seller may allow the buyer to submit the deposit late and proceed with the transaction, although the seller isn't obligated to do so.
What if the Seller Sells the Property for More after the Breach?
Courts have established that deposits typically serve as an estimate of liquidated damages to be paid if the buyer breaches the agreement. Even if the seller doesn't suffer any financial loss, they can still sue a buyer who fails to pay the deposit for the deposit's amount.
Based on current case law, the seller is likely to have a strong chance of success in such a lawsuit.
For sellers facing this situation, it's crucial to consult with a lawyer promptly and refrain from signing a Mutual Release, as doing so forfeits the right to sue the defaulting buyer.
In short: buyers should not assume that by neglecting to pay the deposit, they can simply walk away from the deal.
Greg Weedon practices with the real estate litigation department in Toronto. If you have questions about the information contained within this article or any other real estate questions, please contact Weedon Law and set up an appointment.