Protecting Buyers When the Seller Cannot Close: A Deposit-Matching Clause Secured by the Property
In most real estate transactions, the Buyer provides a deposit, usually held in trust by the Listing Brokerage. If the Buyer defaults, the Seller typically claims the deposit as damages.
But what happens if the Seller cannot close?
This situation arises more often than people think, sometimes due to title problems, financing issues, undisclosed mortgages, or simply because the Seller has entered into another transaction and cannot complete the chain.
Right now, the market has declined by about 20% to 25% since February of 2022. Many Sellers who bought at that time are now “underwater”.
The immediate difficulty is obvious: the Seller rarely provides a deposit. If the Seller defaults and has no available funds, the Buyer may win a lawsuit but still struggle to collect.
One contractual tool that can improve the Buyer’s position is a deposit-matching clause secured by the property itself.
The Concept
The idea is simple:
- The Buyer pays a deposit in the usual way.
- If the Sellerdefaults, the Seller must pay an amount equal to the Buyer’s deposit.
- That obligation becomes secured against the property, allowing the Buyer to register a claim against title.
- The clause should also make clear that the Buyer may pursue additional damages beyond that amount.
This transforms what would otherwise be an unsecured promise into an obligation that attaches to the land.
Seller Default – Deposit Security Clause
“The Buyer has delivered a deposit in the amount of $________ (the “Deposit”) to be held in trust pursuant to this Agreement.
If this transaction fails to complete on the scheduled completion date due solely to the Seller’s default or inability to complete the sale in accordance with the terms of this Agreement, the Buyer shall be entitled to the immediate return of their Deposit.
In addition, the Seller agrees that an amount equal to the Deposit shall immediately become a debt due and owing by the Seller to the Buyer.
The Seller hereby charges the property described in this Agreement with payment of that amount and agrees that the Buyer shall be entitled to register notice of such charge against title to the property as security for payment of the debt. The Seller agrees to execute any documents reasonably required to give effect to such charge.
The parties acknowledge that the damages arising from the Seller’s failure to complete the transaction would be difficult to ascertain and that the amount secured hereby represents a genuine pre-estimate of damages and is not intended as a penalty.
The Buyer shall not be limited to this amount and shall remain entitled to pursue any additional damages or remedies available at law or in equity arising from the Seller’s failure to complete this Agreement.”
Why Security Against the Property Matters
If the Seller has no available funds, a clause requiring payment alone offers little protection. By allowing the Buyer to register a claim against title, the Buyer gains real leverage:
- The Seller cannot easily sell or refinance the property.
- The claim becomes tied to the land itself, not merely to the Seller personally.
- The Buyer gains negotiating power while pursuing legal remedies.
The Legal Context
Ontario Courts recognize that damages may arise when a real estate transaction fails to close due to the Seller’s breach. The nature of the remedy damages or specific performance has been addressed by the Supreme Court of Canada in
Semelhago v. Paramadevan 1996 (SCC).
That decision confirmed that “damages are often the primary remedy” when real estate transactions collapse, particularly where the property is not considered unique.
Considerations for Real Estate Agents
Deposits work because the money already exists and is held in trust.
When a Seller defaults, however, the Buyer may face the opposite situation:no deposit and no readily available funds.
A clause that ties the Seller’s obligation to the property itself can provide a meaningful layer of protection and may significantly improve the Buyer’s negotiating position if the deal fails to close.
The use of a deposit clause permits the Buyer to proceed to secure a Judgment via a Motion rather than a Trial. The Motion should be heard in 12 months, while the Trial is likely 36 months. So, this is a much better and expeditious litigation route.
Brian Madigan LL.B., Broker
www.OntarioRealEstateSource.com