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Must Seller Suffer Damages in Order to Retain Deposit?

The B.C. Court of Appeal recently scrutinized the law on whether real estate deposits are refundable, and confirmed important points about their general nature and legal purpose.
The facts involved a residential real estate transaction governed by a standard form agreement of purchase and sale. Despite having paid a $100,000 deposit, the buyer was unable to close on the specified date. The sellers then terminated the contract, and were able to sell the property to another party for a higher price.  Relying on the buyer’s breach, the sellers claimed the right to keep the $100,000 deposit; not surprisingly, the buyer wanted it returned.

The parties disagreed on the proper interpretation of the standard form’s “deposit clause”, which stated that in the event of the buyer’s breach, any deposit would be forfeited to the sellers “on account of damages”.  Since the sellers had not suffered any actual damages in this case, the question for the court was whether, in light of this wording, they were entitled to keep the deposit nonetheless. A lower court had ruled that they were not.

That ruling was overturned on subsequent appeal. The B.C. Appeal Court confirmed that under established Canadian law, a “true” deposit is traditionally viewed as non-refundable “earnest money for the performance of the contract”, rather than as an up-front part payment.  If the buyer breaches the contract, the deposit is usually forfeited. (The exception is where the deposit essentially constitutes a penalty imposed on the buyer, or where the deposit amount is unreasonable in light of the overall transaction. In such cases a court may order relief against forfeiture). Historically, the Court said, deposits were designed to motivate the parties to carry out their bargains.

With that said, the law does recognize that there can be refundable as well as non-refundable deposits; the contract’s particular wording determines which type is in play. Several basic principles govern the interpretation exercise:

Applying these concepts, the standard form contract in this case provided for the buyer’s deposit to be “absolutely forfeited” to the seller; the phrase “on account of damages” was not intended to limit forfeiture to situations where the seller had actually suffered damages. The sellers were accordingly entitled to keep the $100,000 deposit the buyer had paid. See Tang v. Zhang, 2013 (BCCA).