Let’s have a look at an “earned payment” and how this might work. We will first examine some of the standard provisions that apply to deposits.
Deposit Clause in Agreement (first page)
DEPOSIT:
Buyer submits ……………………………………………………………………………………………………………(Herewith/Upon Acceptance/as otherwise described in this Agreement) ……………………………………………………………………………………………………………Dollars (CDN$) …………………………………… by negotiable cheque payable to …………………………………………………….. “Deposit Holder” to be held in trust pending completion or other termination of this Agreement and to be credited toward the Purchase Price on completion. For the purposes of this Agreement, “Upon Acceptance” shall mean that the Buyer is required to deliver the deposit to the Deposit Holder within 24 hours of the acceptance of this Agreement. The parties to this Agreement hereby acknowledge that, unless otherwise provided for in this Agreement, the Deposit Holder shall place the deposit in trust in the Deposit Holder’s non-interest bearing Real Estate Trust Account and no interest shall be earned, received or paid on the deposit.
Supplementary Deposit
Deposit Increase – Additional Payment
The Buyer agrees to pay a further sum of ____________________ ($ __________), to ____________________, by negotiable cheque, not later than _____ p.m. on the _____ day of __________, 20_____, 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.
Increase in Deposit
Deposit Increase – On Removal of Condition(s)
The Buyer agrees to pay a further sum of ____________________ ($ __________), to ____________________, by negotiable cheque, at the time of notification of fulfilment or removal of the condition pertaining to ____________________, as an additional 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.
Regular Deposit clause
You will notice that these are the regular straightforward deposit clauses to be used in an ordinary situation.
The initial deposit is paid with the contract formation, possibly a second deposit to follow and if we move past the due diligence period, another deposit.
With the standard wording, the deposit is a sign of good faith. Failure to deliver the deposit “in time” is a breach of contract entitling the Seller to terminate and seek damages in addition to claiming the deposit itself.
Courts will not enforce a “penalty clause” on behalf of the parties. If the deposit is too high, then Courts may consider it to be a “penalty”. It’s at risk if it’s over 20% of the purchase price. A deposit up to 7% is quite reasonable and will easily be enforced by the Courts. Deposits in excess of 30% have been accepted at the Trial level.
If the deal closes, the deposit will be credited towards the purchase price.
If the deal doesn’t close, and if it was the Seller’s fault; then the deposit will be returned.
If the deal doesn’t close, and if it was the Buyer’s fault; then the deposit will be forfeited.
Non-refundable Deposit
In this situation, we are trying to change the common law. That’s possible, but you have to say so. First, it might be best to refer to a non-refundable “payment”. Don’t call it a “deposit”. That word contains a great deal of hidden meanings and legal implications with it. But, calling it a “payment” would be fine.
Earning the Payment
By having proper consideration in the transaction for the earned payment (a designated amount of the deposit) or a portion of it, the enforcement by the Courts is much more likely. It was a term of the agreement like any other provision.
Farmer’s land and the development deal
We start off with a farm. It’s worth $2 million if it’s a farm, but it’s worth $25 million if it’s a developable property.
So, the farmer wants to sell for $25 million, but the developer wants a subdivision not a farm.
Let’s put $500,000.00 down into the deal. The developer has all kinds of conditions from re-zoning to the total acreage that can be developed and the purposes. The deal will often be outstanding for 12 months, 18 months or 24 months.
Is it then fair if the developer simply “walks away”.
Essentially, the developer had a 24 month option to purchase “for free”.
In this case, in order to protect the farmer, we could say that the deposit was “non-refundable. Basically, it was earned by the farmer for the developer’s option. The property was tied up. The farmer could not terminate the deal. If over the transaction period the value goes up by 10%, the developer keeps the extra $2.5 million. If it goes down over the same period, the developer terminates and walks away.
Here, the only point would be: why shouldn’t the farmer keep the $500,000 deposit? That would be fair.
Once we know the “deal”, there are two ways to document it in the Agreement:
- Non-refundable deposit, or
- Earned Payment.
If we choose #1, then we have legal issues relating to penalty clauses and relief from forfeiture.
However, if we choose #2, then we have an “earned payment”. It’s part of the deal. There’s no breach here. The farmer earned the money by reason of the lapse in time.
This means that if we express this same point in a less controversial way, then we eliminate problems.
Brian Madigan LL.B., Broker