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So your real estate transaction failed. Can you recover your deposit?

Generally, buyers who are unable to close the purchase of real estate risk losing their deposits, even if the seller suffers no loss. This outcome occurs because of the following three factors:

  1. The agreement of purchase and sale (the “APS”) often includes wording to the effect that in the event the buyer fails to complete the purchase, the deposit is forfeited to the seller;
  2. The APS often states that the deposits are “deposit monies only and not partial payments”;1 and
  3. The principle that a forfeited deposit is not compensation for a party failing to perform a contract, but that it is security to ensure that a party performs their contractual obligations.2

However, there are instances where a seller would be required to return the buyer’s deposit regardless of the above factors. The legal remedy that allows a buyer to get their deposit back in a failed real estate transaction is called relief from forfeiture and the court’s authority to grant it is set out in section 98 of the Courts of Justice Act.3 Relief from forfeiture is an equitable and highly discretionary remedy that applies in several contexts. In the real estate context, it allows the court to protect a buyer or seller that repudiated/breached the APS by permitting the breaching party to have a deposit returned or kept by them.

There are arguably two different tests that could be used by the courts to determine if a buyer should be relieved from forfeiting their deposit. The first is outlined in an Ontario Court of Appeal case Scicluna v. Solstice Two Limited, which relied on Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., an insurance case. Under this test (“Test 1”), the court considers three factors:

  1. Whether the conduct of the party seeking relief from forfeiture was reasonable;
  2. Whether the object of the right of forfeiture was to secure the payment of money; and
  3. Whether there was a substantial disparity between the value of the property forfeited (the deposit) and the damage caused by the breach.

In Scicluna v. Solstice Two Limited, the buyer provided the seller with a deposit of approximately 80% of the total purchase price of a condo, but was unable to pay the balance because of financial difficulty. The buyer explained these financial issues to the seller, and both parties ultimately executed a Resale Authorization Agreement, allowing the seller to resell the property and return the deposit paid after the signing of a Mutual Release and Termination Agreement. The buyer failed to execute the Release and the seller argued that the buyer forfeited its entitlement to a return of the deposit. The Court of Appeal agreed that the buyer should recover the deposit. The court found that given that the seller was able to resell the unit, not granting relief from forfeiture in these circumstances would be disproportionate to the losses suffered by the vendor, which the court noted were minor.

The second test (“Test 2”) is based on an English Court of Appeal decision, Stockloser v. Johnson.4 Under this test, the court asks two questions:

  1. Is the forfeited deposit out of all proportion to the damages suffered? and
  2. Would it be unconscionable for the vendor to retain the deposit?

In Varajao v. Samaneh Azish,5 a purchaser sought the return of its $75,000 deposit after it failed to close on a $2.9 million house purchase. The purchaser argued that, because the vendor had later resold the property for more money, it was not equitable for the vendor to retain the deposit. The court found that the purchaser had breached the APS by not closing, and the vendor had suffered no damages, but that did not mean that it was unconscionable for the vendor to retain the deposit.6

In Redstone Enterprises Ltd. v. Simple Technology Inc.,7 a buyer failed to close on a $10.225 million warehouse purchase and made deposits totalling $750,000. The seller applied for a declaration that it was entitled to keep the deposit. The application judge found that the amount of the forfeiture was unconscionable as there was no evidence concerning damages suffered by the seller. He granted partial relief from forfeiture and reduced the amount forfeited to $350,000. The seller appealed. The Court of Appeal for Ontario examined the meaning of unconscionability. It determined that the finding of unconscionability must be an exceptional one, strongly compelled by the facts of the case and that the list of the signs of unconscionability is never closed. Ultimately, the court concluded that the seller was entitled to keep the full deposit ($750,000) paid by the buyer even though the seller had not suffered any damages.8

A critical distinction between the two tests is that Test 1 calls for a review and analysis of the buyer’s actions, while Test 2 calls for a review of the reasonableness of allowing the seller to keep the buyer’s deposit. Since the Ching decision was released in July of 2021, it is not clear which of the two tests is THE TEST to apply in Ontario in the context of real estate deposits. While the court in Ching noted that these tests were arguably distinct from one another, it did not clarify which test (or a combination thereof) the lower courts should follow.

So then, if the courts have the power to return the buyer’s deposit, why didn’t the Chings, the buyers, in Ching get back their deposit?9

To summarize, in Ching, the buyers entered into an APS in 2008 for the purchase of a condominium under construction in Toronto and paid a deposit totalling $214,238.85. The APS provided that time was of the essence. The original completion date was going to be in 2010, but the seller extended the date eight times between 2010 and 2014 for various reasons, including construction delays, strikes and bad weather. None of these reasons were permitted under the APS. However, the buyers never complained. The buyers could not secure mortgage financing and could not close, so they failed to meet their contractual obligations. They sued the sellers for damages arising from the seller’s breach of the APS and requested relief from forfeiture of their deposit. The buyers were unsuccessful at trial and on appeal.  (see our prior blog post, How to Terminate an Agreement of Purchase and Sale if the Seller Breaches the Agreement, which analyzed the Ching case and summarized ways in which a buyer might try to get out of the purchase of a property. It offers a more in-depth overview of the facts in Ching).

The trial judge in Ching used Test 1 to determine that the buyers were not entitled to a return of their deposit. The Court of Appeal refused to interfere with the trial judge’s finding because the decision to permit relief from forfeiture is discretionary, and the trial judge did not commit any reviewable errors.

Although the Chings did not get their deposit back, as stated earlier, relief from forfeiture is discretionary. It is based on the specific facts of a particular case, so there is a chance that if a seller acts in a manner similar to that of the sellers in Ching (i.e. fails to honour their contractual obligations), a buyer could still get their deposit back if the court believes that the factual circumstances applicable to that case warrant a return of the deposit.

 

Footnotes
  1.   Koutcherenko v. Queensgate Homes Inc., 2013 ONSC 3350
     
  2.   Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149, at para. 14
     
  3.   s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43
     
  4.   Stockloser v. Johnson, (1954) 1 Q.B. 476 (C.A. (Eng.))
     
  5.   2015 ONCA 218
     
  6.   2015 ONCA 218
     
  7.   2017 ONCA 282
     
  8.   2017 ONCA 282
     
  9.   2021 ONCA 551
     

Lucinda Bendu and Peter Neufeld

The authors of this blog are Lucinda Bendu and Peter Neufeld. Lucinda and Peter are associates at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate and commercial litigation.

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This blog is not intended to serve as a comprehensive treatment of the topic. It is not meant to be legal advice. Every case turns on its specific facts and it would be a mistake for the reader of this blog to conclude how it might impact on the reader’s case. Nothing replaces retaining a qualified, competent lawyer, well versed in this niche area of practice and getting some good legal advice.
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