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When a purchase and sale transaction fails due to a breach of contract by the buyer, there is often uncertainty surrounding entitlement to any deposits made on the purchase. Generally, buyers who breach the Agreement of Purchase and Sale forfeit the deposit to the seller. However, buyers may apply to the Courts for relief from forfeiture to prevent this outcome.

Recently, the Ontario Court of Appeal clarified certain matters related to relief from forfeiture of deposits on an agreement of purchase and sale. In 1854329 Ontario Inc. v. Cairo, 2022 ONCA 744, the appellant (the “Buyer”) signed an Agreement of Purchase and Sale (the “APS”) with the respondent (the “Seller”) to purchase a commercial building from the Seller for a total of $7.25 million (the “Original Purchase Price”), and put down an initial deposit of $200,000.00. The APS contained a financing condition for the benefit of the Buyer, and the APS further provided that if the Buyer waived the financing condition, it would be required to put down an additional $200,000.00 deposit so that the deposits totalled $400,000.00 (the “Deposit”). The Buyer subsequently received a term sheet from Business Development Bank of Canada (the “Lender”), which set out the proposed loan terms, but was not an actual offer to provide the loan. Based on the term sheet provided by the Lender, the Buyer waived its financing condition and put down the further $200,000.00 towards the Deposit. The Lender later changed its loan terms, which meant that the Buyer could no longer qualify for the loan. As the Buyer could not fund the purchase without the loan, its counsel requested a six month extension from the Seller’s counsel, which extension request was denied. The Seller tendered and later sold the property for $75,000.00 less than the Original Purchase Price.

The Seller later applied for summary judgment to receive the full Deposit, while the Buyer requested for relief from forfeiture of the Deposit. The motion judge ruled in favour of the Seller and found that it was entitled to the full amount of the Deposit. The Buyer appealed.

The Ontario Court of Appeal upheld the decision of the motion judge, providing the following reasons for the decision:

• The Deposit, which was 5.5% of the sale price, was considered commercially reasonable and not disproportionate to the amount of damages incurred by the Seller
• The court found that there was no inequality in terms of bargaining power between the parties
• There was no substantially unfair bargain
• The Seller did not act unreasonably (and there was no evidence that the Buyer or its counsel attempted to seriously negotiate, or provide compensation to the Seller)
• When the Buyer waived the financing condition, it assumed the related risks

Ultimately, the Buyer was not able to prove that its case was exceptional enough for relief from forfeiture to be granted. There are important takeaways from this case for buyers, sellers, and real estate lawyers alike:

• When a buyer waives its financing condition without having the requisite cash on hand to complete the transaction, it assumes all related risks of the loan falling through. Buyers should not be waiving their financing conditions based on preliminary loan terms, and without having a firm loan offer/commitment
• If a deposit is considered to be proportionate to the purchase price, this weighs against the buyer when it comes to relief from forfeiture
• If the buyer and seller were on equal footing in terms of bargaining power, this weighs against the buyer when it comes to relief from forfeiture
• If the seller acted reasonably throughout, this weighs against the buyer when it comes to relief from forfeiture. Buyers and their counsel must ensure that serious negotiation attempts are made to salvage a failing transaction, including making serious offers of compensation to the seller

Please see below for the complete decision of the Ontario Court of Appeal:

https://www.canlii.org/en/on/onca/doc/2022/2022onca744/2022onca744.html?autocompleteStr=Cairo&autocompletePos=1

When it comes to your own transactions, reach out to a knowledgeable lawyer at Kormans LLP for reliable advice. Please do not hesitate to contact us at (905) 270-6660 or e-mail us at:  Info@kormans.ca.

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Reem Haroon is an Associate Lawyer with Kormans LLP. You can reach Reem at rharoon@kormans.ca. The information and comments herein are for the general information of the reader and are not intended as advice or opinion to be relied upon in relation to any particular circumstances. For particular application of the law to specific situations, the reader should seek professional advice. Kormans LLP cannot be responsible for the content of other sites. We expressly disclaim all liability with respect to actions taken or actions not taken based on content received from a third party website linked, directly or indirectly, to that of Kormans LLP.  The link to another site is not to be construed in any way as an endorsement of the host, the site or the information contained therein, nor is such link to be inferred as an association or affiliation with the host.