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Buyer Seeks Relief From Forfeiture of Entire $750,000 Deposit

In a recent decision, the Ontario Court of Appeal overturned a prior ruling in which a lower court had given the intended purchaser of an industrial property a break on losing the full amount of a $750,000 deposit that had been tendered as part of the deal.

The buyer had agreed to purchase a warehouse from the seller for over $10 million, with the intention of using it to set up a licensed marijuana grow-op. The Agreement of Purchase and Sale had provided for an initial deposit of $100,000 to be made on a specified date, with a series of additional deposits due in the event that the buyer was willing to waive certain conditions that had been inserted for its benefit. Because Health Canada was taking longer than expected to issue the needed approval for a license to grow marijuana, the buyer also voluntarily submitted an additional deposit of $450,000 as a gesture of good faith in return for the seller extending the closing date. Eventually the pre-closing deposits tendered by the buyer totaled $750,000.

When the buyer was unable to obtain both the needed license from Health Canada and the necessary financing, it failed to complete the deal. The seller applied to the court for a declaration that it was entitled to keep the $750,000 deposit.

On the initial application, the judge allowed the seller to keep some of the deposit, but found that $750,000 was too much in all the circumstances. Rather than award the full amount, the judge used his discretion to order that the seller was entitled to retain only $350,000. In legal terms, this was tantamount to allowing the buyer partial relief from what would otherwise have been the forfeiture of the full deposit amount.

The seller appealed, and asked for an order restoring the amount of the forfeited deposit back to $750,000 plus interest, being the amount stipulated in the original agreement and subsequent amendments.

The Court of Appeal granted the order and allowed the seller to keep the entire $750,000. It observed that to successfully establish that it was entitled to relief from forfeiture of the $750,000, the buyer had to prove two things:

  1. that the proposed forfeited sum was out of proportion to the damages suffered by the seller; and
  2. that it was unconscionable for the seller to keep the deposit.

In this case, the seller had not given any evidence that it suffered damages because of the aborted deal, so it was impossible to assess the proportionality of the forfeited sum. However, the court said it was still required to “step back and consider the full commercial context” in order to evaluate the unconscionability of the circumstances.

The court observed that large deposits are commonplace in such commercial real estate transactions. They are intended to motivate the parties to carry out their bargain, not to penalize them if they do not do so. The $750,000 deposit paid on this $10 million deal, representing 7% of the purchase price, was not grossly disproportionate overall.

As the court stated:

While in some circumstances a disproportionately large deposit…could be found to be unconscionable, this is not such a case.

Instead, the court added that a finding of unconscionability was exceptional, and it required evaluating other factors, such as whether:

  1. there was inequality of bargaining power between buyer and seller;
  2. the bargain was otherwise substantially unfair;
  3. the parties were sophisticated; and
  4. there were negotiations made in good faith.

The gravity of the buyer’s breach and the parties’ overall conduct was also relevant.

Since the lower court judge had wholly failed to examine these factors, his decision to reduce the amount of the deposit that was to be forfeited was unwarranted. Moreover, when the Appeal Court applied a more fulsome evaluation it concluded that there was no unconscionability here. The buyer’s large deposit was commercially reasonable in the larger context of this transaction, and its breach of the agreement entitled the seller to keep the funds.

The appeal was therefore allowed and the amount of the forfeited deposit was increased from $350,000 to $750,000, with accrued interest payable to the seller, plus costs. See Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282.