In a recent court case, the purchaser signed a standard form of Agreement of Purchase and Sale to buy the vendor’s residential property. The price was $2-million plus and a $100,000 deposit was given. The agreement stated that if the purchaser defaulted, “the deposit would go to the vendor on account of damages”.
When the purchaser failed to close, the vendor resold his residence “at a higher price”. One can easily determine what issue arose. Did the vendor have the right to keep the deposit?
The trial judge held that the vendor suffered no loss and therefore was not entitled to the deposit (vendor sold for a higher price).
The British Columbia Court of Appeal laid down a number of rules:
1. Whether the deposit was forfeited to the vendor was a matter of contract interpretation;
2. Usually the word “deposit”, absent wording to the contrary, in writing means exactly that (a deposit);
3. A “true deposit” was meant to motivate seller/buyer to close the transaction.
The court’s interpretation was that a deposit would generally be forfeited if the buyer repudiates (even without proof of damages). If the deal did close, the deposit would have been applied to the purchase price. A true deposit is contrary to a penalty sum where it represents a genuine pre-estimate of damages.
If the vendor retained the deposit and that led the court to find that it was penal or unconscionable, the court may give relief.
Is that clear? I do not believe so because the Court of Appeal ruled that the deposit was forfeited in this case because the purchaser did not close. Frankly, unless you specifically insert a clause that there is no forfeiture if the vendor suffers no loss in purchase price, the vendor will succeed. Notwithstanding the wording that says, “Deposit given to the vendor was on account of damages.” Is the true essence of this case that the court would not allow the vendor to breach the contract with immunity? (Tang v. Zhang, 2013 BCCA 52)
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In another case, the plaintiff, a purchaser of a condominium, paid a deposit of $745,325 (25 per cent of the purchase price). Unfortunately the plaintiff could not secure his financing in time because he was overseas and was hospitalized after a motor vehicle accident. The extension of the closing date was negotiated, but that closing date passed with the plaintiff still unable to provide financing.
The vendor refused any further extensions, declared the contract terminated and relied on the Agreement of Purchase and Sale to retain the deposit. The plaintiff in turn sued for specific performance or return of the deposit on the contractual terms, regarding forfeiture as invalid.
The trial judge found that the vendor was not in breach of contract, that the agreement gave the vendor the right to set the completion date and that the contract called for a forfeiture of the deposit and was enforceable.
On appeal to the British Columbia Court of Appeal, the court upheld the original judgment. The wording of the agreement was clear that the deposit was held on account of the purchase price and was to be forfeited to the vendor if the purchaser could not complete. The deposit was characterized as a “true deposit” even though there was another provision stating that the deposit constituted a genuine pre-estimate of damages. The Court of Appeal still said that this was a true deposit despite the forfeiture provisions of a genuine pre-estimate and the forfeiture was therefore permitted and payment was upheld to the vendor. (Amiri v. One West Holdings Ltd., 2013 BCCA 155)
Full decisions are available at canlii.org.
Donald Lapowich, Q.C. is a partner at the law firm of Koskie, Minsky in Toronto, where he practices civil litigation, with a particular emphasis on real estate litigation and mediation, acting for builders, real estate agents and lawyers.
