The Ontario Court of Appeal just had an opportunity to consider the size of a deposit in an agreement.
If it’s too large, it might be struck down as a “penalty” and a penalty is not allowed. There is also a discretion provided to Judges to make a decision permitting “relief from forfeiture”, so even if the deposit were not struck down as a penalty, a defaulting party might still get it back.
In Jensen v. Chicoine on 5 January 2018, the Court of Appeal decided that a $100,000.00 deposit on a $500,000.00 deal should be forfeited as a deposit and not returned.
So, that’s clearly 20%. No mention by the Court that it was close to the limit either.
It’s doubtful whether this was a real estate deal. That was probably unlikely.
The parties entered a deal. The total sum of $100,000.00 was paid over. The Trial Judge determined that this amount was to be considered a deposit. The parties didn’t use lawyers to craft the documents. When the deal “fell apart”, the parties came up with a terminating agreement. Again, they didn’t use lawyers, so it was vague. Nevertheless, the Trial Judge concluded that the $100,000.00 paid was to stay with the Seller.
All in all, this suggests that a deposit comprising 20% of the purchase price in a real estate transaction would not constitute as penalty as being too large, nor would the Court’s relief from forfeiture powers likely be exercised.
Brian Madigan LL.B., Broker