In the volatile residential real estate market conditions in Ontario during the past year or so the forfeiture of deposits has become a crucial issue often encountered during transactions when one party (more often the Buyer) fails to fulfill its obligations under an Agreement of Purchase and Sale (APS).

Typically, a deposit in real estate transactions is a portion of the purchase price provided by the Buyer to show the Buyer’s commitment to the deal. The deposit is usually held in trust by the listing brokerage or the Seller’s lawyer. Under Ontario law, a deposit is generally seen as a form of security from the Buyer to the Seller for the completion of the purchase in consideration of the Seller no longer offering the property for sale to any other party

Forfeiture of the deposit can occur when the Buyer defaults on the APS without a valid legal reason or the required conditions. The most common cause of forfeiture of the deposit is the Buyer's failure to complete the APS (e.g., non-payment of the balance of the purchase price, refusal to complete the transaction, or failure to close by the agreed-upon completion date). When this occurs the Seller usually has the right to terminate the APS and keep the deposit as compensation (in whole or in part) for the Buyer’s breach.

Ontario courts have dealt with several cases addressing whether forfeiture of the deposit is appropriate. If a Buyer breaches the APS, the Seller’s entitlement to forfeit the deposit has been upheld in numerous cases unless the Seller has acted in bad faith or the breach was excused. The Courts sometimes examine whether the Seller has made reasonable efforts to resell the property or mitigate their losses before ordering the forfeiture of the deposit. In cases where the Seller breaches the APS, the Buyer may be entitled to a refund of the deposit, especially if the Seller fails to perform the Seller’s obligations (e.g., the Seller can't deliver title).

The Courts may apply equitable principles to determine whether forfeiting the deposit is just. If the Buyer’s breach is considered minor or unintentional, they may be entitled to the return of the deposit despite the terms of the APS. In contrast, for more serious breaches, Courts tend to uphold the forfeiture.

The terms of the APS play a pivotal role in determining the outcome. Most standard APS’s contain specific clauses that govern the deposit, including conditions under which forfeiture is triggered. Buyers and Sellers alike must understand these provisions to avoid legal complications. The conduct of the parties, and whether the parties followed proper procedures to terminate the APS are also crucial determining factors.

In summary, while forfeiting a deposit is a common consequence of a breach in Ontario real estate law, whether or not it is legally justified depends on various factors, including the nature of the breach, the contractual terms, and equitable considerations. The Courts generally uphold deposit forfeitures where there is a material breach, but they may also intervene to protect the interests of the defaulting party in specific circumstances.

Sound and timely legal advice is imperative. Kormans LLP accomplishes this through our experience and understanding of the rights of the parties, and our availability to provide such advice to our clients and their realtors.

For more information about this topic, please feel free to contact one of our lawyers! Email us at info@kormans.ca or call (905) 270-6660.