The Non-Refundable Deposit Issue

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Securing the Deal for the Vendor

There are many situations where a Vendor would like to ensure that the Buyer brings a good deposit to the table and as time goes by, it will not be returned to the Buyer under any circumstances.

So, what do you do?

Well, whatever you decide, just don’t call it a “deposit”. That could be deadly, because the law related to the treatment of deposits will apply. Those laws go back about 140 years to a case Howe v. Smith (U.K. 1884), and there are no changes planned at the moment.

It’s important to know that all deposits are “non-refundable”, so adding that description won’t really help.

Basic Law

  • If the Buyer is in breach, the Seller gets the deposit.
  • If the Seller is in breach, the Buyer gets the deposit.

Who decides?

  • First, the parties themselves, if they are in agreement.
  • Second, the Court, if there is no agreement.

If we have a situation where the parties are opposed, and cannot reach a settlement, then the matter must be referred to Court for a decision. In Ontario, usually, this will result in a motion before a Judge of the Superior Court of Justice. A motion record needs to be prepared, an Affidavit of Documents provided, and transcripts of any cross-examinations which took place on those affidavits. That is probably a 3 to 6 month process. Waiting for a court date, could easily be another few months. Generally, these types of applications take place about one year after the events occurred.

Protecting the Vendor

There are a number of options available to protect the Vendor. These will frequently take place in a larger transaction, or one which is commercial in nature, both with long closing dates.

The purpose would be to protect the Vendor over a longer period of time when the expectation is that the property will substantially increase in value over that same time period. If we had a million dollar property, rising at 10% per annum and a one year closing, then, we would have an additional $100,000.00 accruing to the Buyer on completion.

In this situation, the Buyer might very well want to ensure that the Vendor is cooperative and still anxious to close the deal one year out.

Alternatives

There are several alternatives available: an option, a down payment, a partial payment, a prepayment, a collateral agreement, a trust agreement with a party other than a registrant.

It’s important not to describe the payment as a deposit, because, if you do, then we have the law of deposits coming into play. So, simply approach the matter differently, and describe the payment as something else.

Option

If we had an option to purchase, then the Buyer pays for that option. The money goes to the Seller, and upon expiry of the option, the Seller keeps those funds and there is no obligation to convey the property.

Downpayment

A downpayment can be used. The Buyer has elected to proceed with the transaction and has paid the first, second or third payments. These are not deposits towards a pending deal.

Partial Payment

A partial payment is treated in the same way as a downpayment from a contractual perspective. The first payment is often referred to as the “downpayment” and subsequent payments are partial payments.

Prepayment

This is a payment much like those noted above. It’s a payment which is made in advance of the transaction.

Collateral Agreement

A collateral agreement is independent of the Agreement of Purchase and Sale. It stands on its own. The success or failure of the closing of that transaction does not affect the outcome of the collateral agreement.

Trust Agreement

This type of arrangement involves a third party stakeholder who agrees to hold the funds subject to certain conditions. It may be for one party or both parties and it may or may not include fiduciary obligations.

In the case of the OREA Standard Form Agreement of Purchase and Sale, a Brokerage under the Real Estate and Business Brokers Act holds the deposit funds in trust for both parties.

The same obligations are placed upon a solicitor in similar circumstances.

In order to release the funds held in trust for both parties, we need both parties to agree, or alternatively, if they don’t agree, a Court Order directing the transfer of funds.

Creatively, the parties could agree to a trust whereby fiduciary duties are only owed to the Seller, and where the transfer is to be undertaken on a certain date, without any further direction, subject only to a Court Order stating otherwise. So, when that certain date is reached, the funds are automatically remitted to the Seller, absent any kind of Court Order.

Certainly, the stakeholder can tell the time. They know what day it is. So, if the money is to be pay out on June 29th by 5:00 pm, with a closing scheduled for June 30th, then once 5:00 pm on June 29th arrives, the payment is to be made unless there was a Court Order to the contrary. No Court order, write that cheque!

Direct Payment

Let’s consider an initial direct payment upfront to the Seller. Here, no funds are ever in trust. The payment is already made, and the Seller can spend the funds in any way he might wish, with the deal not to be consummated for another year.

Interest on the Funds

This is an issue which should be considered. Certainly, if there is going to be a substantial sum paid, to be held in trust, by a stakeholder for a substantial period of time, then there should be interest. The interest could follow the payment. The interest could be paid to the Buyer, no matter what. The interest could be paid to the Seller, no matter what. Or, the parties might split the interest 50/50.

Credit Towards the Purchase Price

If an early payment is made, is it to be credited towards the purchase price, or is it an additional payment. That matter should, of course, be addressed. If you describe it as a deposit and say nothing else, then, it will be credited. If the Vendor is to keep these funds, no matter what, then, perhaps there should be no credit. This is just like an option.

Conclusion

There are many different alternatives available. Be careful to choose the one which is best suited to your circumstances. And, by the way, this is not an exhaustive list. So, be creative!

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

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