Question:
How large should the deposit be?
Answer:
The deposit is a pre-estimate by the parties of the minimum liquidated damages that will be suffered by a Seller in the event of a breach. It’s supposed to be sufficient in size to motivate a Buyer to complete the deal.
The law of deposits is Province wide. It’s not like a local by-law in a municipality. A million dollar deal is a million dollar deal everywhere, as long as you’re not using monopoly money.
Very rarely have I seen a damage calculation which is less than 5%. It’s usually 7% or 8%. In addition, in most cases where the deal has fallen through, there’s an additional amount owing to the real estate agents for commission. That’s an additional 5.0% plus HST of 0.13%, or a total of 5.13%, on top of the 7% to 8%.
On a million dollar deal going sideways, that’s 13.13%, or $131,300.00 plus legal fees and expenses.
If the amount of the deposit is not even sufficient to look after the HST on a commission, you will appreciate that it is far too low. That’s a major problem for the Listing agent. If it’s over 20%, that would be too much, and would represent a problem too.
Brian Madigan LL.B., Broker