There are very good reason from the perspective of the Buyer that the deposit should not be increased too much. Once a certain level has be reached additional moneys should constitute a “partial payment”.
Here’s what the usual clause provides:
Deposit Increase – Additional Payment
“The Buyer agrees to pay a further sum of ($25,000.00), to ABC Brokerage in trust, by negotiable cheque, not later than 5:00 p.m. on the 11th day of December, 2022, as a supplementary deposit to be held in trust in the same manner as the initial deposit pending completion or other termination of this Agreement. This amount is to be credited towards the purchase price on completion of this transaction.”
The above clause is clearly an additional deposit. The clause says so. But what if the Buyer has already reached an acceptable deposit threshold?
Rather than add to the Buyer’s risks, the Buyer should have the additional amount described as a partial payment, and not a deposit.
It might appear as follows:
Partial Payment – Additional Payment
“The Buyer agrees to pay a further sum of ($25,000.00), to ABC Brokerage in trust, by negotiable cheque, not later than 5:00 p.m. on the 11th day of December, 2022, as a partial prepayment of the purchase price (and not as a deposit) to be held in trust pending completion or other termination of this Agreement. This amount is to be credited towards the purchase price on completion of this transaction.”
And, for those Buyer’s agents who are still a little nervous, it might read:
Partial Payment – Additional Payment
“The Buyer agrees to pay a further sum of ($25,000.00 ), to ABC Brokerage in trust, by negotiable cheque, not later than 5:00 p.m. on the 11th day of December, 2022, as a partial prepayment of the purchase price (and not as a deposit) to be held in trust pending completion or other termination of this Agreement. This amount together with interest thereon is to be credited towards the purchase price on completion of this transaction. In the event of non-completion of the transaction for any reason whatsoever, such amount shall be returned to the Buyer together with any interest earned thereon and shall not be subject to forfeiture as a deposit. ”
COMMENT
At this point in the transaction, the Buyer has already provided a sufficient deposit. Let’s say, that is, 5% or $50,000.00 on a million dollar transaction. This additional $25,000.00 is indeed extra security, but the very basic point is that this $25,000.00 is simply evidence of security, it is not subject to automatic forfeiture without proof of damages.
Deposits should generally be in the range of 4% to 7%. Courts have frequently agreed to deposits being forfeited up to 20%. After that, they are at risk of being set aside as constituting a penalty.
So, why part with anything more than a 5% deposit? That seems rather cavalier and foolhardy. In this situation the Seller has:
- Deposit of $50,000.00, and
- Partial payment of $25,000.00.
In the event of Buyer’s default, the deposit of $50,000.00 automatically goes to the Seller, even if the Seller hasn’t lost any money. If however, the transaction is not completed due to the Buyer’s fault and the Seller can prove $100,000.00 in losses, the Seller would be entitled to:
- Be awarded the Deposit of $50,000.00,
- Be awarded the Partial payment of $25,000.00, and
- Judgment against the Buyer for an additional sum of $25,000.00
The Seller should be pleased. The money was still in trust, but the Seller had to prove actual losses to get more than the $50,000.00 held as a deposit. That’s seems fair.
Brian Madigan LL.B., Broker