The Canadian Bar Association
Real Estate

Failure to close property deal costs buyer entire deposit

Property buyers who waive conditions should be prepared to forfeit their entire deposit if they fail to close the deal, says Toronto real estate lawyer Andrew Fortis.

In a recent case, the Ontario Court of Appeal overturned a lower court decision that allowed the buyer in a collapsed $10-million property deal to claim back more than half of its $750,000 deposit, despite having no legal justification for failing to complete the purchase.

The high court’s unanimous three-judge panel topped the forfeiture up to the full $750,000, finding nothing “unconscionable” about that amount.

“You need to be careful when you waive conditions. When you do, you should be aware that if you fail to close, you are putting your deposit at risk of forfeiture,” Fortis, a partner with Hummingbird Lawyers LLP, tells AdvocateDaily.com.

“For a deposit that is no greater than 20 per cent of the total price, there’s a strong likelihood that you will forfeit the entire amount,” he adds.

The dispute before the appeal court involved a buyer in search of a property from which it could run a licensed marijuana grow-op. It found a warehouse in Brantford, Ont., and agreed to a $10.2 million purchase price with the owner.

After the buyer encountered permit problems with its business, negotiations resulted in an extension of the closing date and the payment of a $750,000 deposit, according to the decision. But the purchaser's struggles continued, and it was unable to get the cash together to close the deal.

Without any evidence of damages to the seller, a Superior Court judge ruled the forfeiture of the entire deposit would be “unconscionable,” and cut the amount to $350,000.

However, the appeal court ruled that the lack of damages alone is not enough to cross the unconscionable threshold.

In its decision, the appeal court went over old case law on the subject, noting that forfeits for contract breaches are generally unlawful without any relationship to damages suffered. However, courts have historically carved out an exception to the rule for deposits on the sale of land, as long as the amount isn’t excessive. In the past, the court said forfeited deposits of 20 per cent have been found reasonable.   

“I would be reluctant to specify a numerical percentage, since much turns on the context. I note, however, that in this case the deposit was slightly more than 7%. There is no evidence that this was a commercially unreasonable deposit,” wrote Ontario Court of Appeal Justice Peter Lauwers for the panel.

After scanning for others signs of unconscionability in the deal, the appeal court found none.   

“This was a straightforward commercial real estate transaction undertaken in the expectation of profit by both sides, who were previously strangers. There was no inequality of bargaining power between them. There was no fiduciary relationship. Both parties were sophisticated,” Lauwers wrote.

Fortis notes, “$750,000 is a great deal of money, but I think the court reasoned pretty well why the full amount had to be forfeited. Both parties knew what they were getting into.”

 

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