Real Estate Deposit Disputes in Ontario: Who Gets the Deposit When a Deal Falls Apart?
When a real estate transaction collapses, both sides often focus immediately on the deposit.
The seller may believe the deposit should be forfeited because the buyer did not close. The buyer may insist on its return because a condition was not satisfied or the seller could not complete the transaction.
The brokerage, if involved in the transaction and holding the deposit, is usually caught in the middle. It must follow its trust obligations and generally cannot decide which party has the stronger legal case.
What Is the Purpose of a Real Estate Deposit?
A deposit shows that the buyer is serious about completing the purchase and provides security for the buyer’s performance.
It is not merely an advance payment that must always be returned if the transaction does not close.
Ontario courts distinguish a deposit from an ordinary part-payment. A true deposit may be forfeited when the buyer defaults, depending on the agreement and the surrounding circumstances.
When Might the Buyer Be Entitled to the Deposit?
A buyer may be entitled to the return of the deposit if:
- A genuine condition was not satisfied;
- The agreement properly came to an end;
- The seller was unable or unwilling to close;
- The parties signed a mutual release; or
- Another term of the agreement provides for the deposit’s return.
Conditions must be read carefully.
Some conditions give a party broad discretion. Others require reasonable or good-faith efforts. Missing a notice deadline or failing to follow the exact wording of a condition can affect the result.
When Might the Seller Be Entitled to the Deposit?
If the agreement was firm, the seller was ready to close and the buyer defaulted, the seller may be entitled to the deposit.
A seller may not have to prove that their actual loss was equal to the deposit before seeking forfeiture.
However, the size of the deposit, the wording of the agreement and the conduct of the parties can all matter. In limited circumstances, a buyer may ask the court for relief from forfeiture.
A seller should not assume that entitlement is automatic before the documents are properly reviewed.
Why Will the Brokerage Not Release the Money?
The deposit is commonly held in the listing brokerage’s trust account.
The brokerage is not a judge and may face liability if it pays the wrong party. If the buyer and seller provide conflicting instructions, the brokerage may continue holding the money until it receives:
- Written directions signed by both parties;
- A settlement or mutual release; or
- A court order deciding who is entitled to the money.
This can be frustrating, but it protects the trust funds while the dispute is being resolved.
Be Careful Before Signing a Mutual Release
A mutual release may affect much more than the deposit.
The release may end all legal claims arising from the transaction. A seller who suffered a resale loss could unintentionally give up a claim for damages. A buyer who alleges that the seller was in default could also lose the right to bring a claim.
The practical question is not only, “Who receives the deposit?” It is also whether either party is giving up a larger legal claim.
A mutual release should be reviewed by a lawyer before it is signed.
Can the Seller Claim More Than the Deposit?
Potentially.
If the seller’s proven losses are greater than the deposit, the seller may be able to claim the difference.
For example, suppose the original agreement was for $1,100,000 with a $50,000 deposit. The buyer fails to close and the property is later resold for $1,000,000.
The seller may seek to retain the $50,000 deposit and claim additional losses, including the remaining price difference and reasonable carrying costs. The precise calculation will depend on the facts and applicable law.
How Is a Deposit Dispute Resolved?
Many deposit disputes are resolved through a lawyer’s demand letter and a negotiated release.
If the parties cannot agree, one party may start a court proceeding seeking payment of the deposit and, where appropriate, additional damages.
The brokerage may also seek directions from the court or pay the disputed money into court so it is no longer caught between competing demands.
The strength of the case usually depends on:
- The Agreement of Purchase and Sale;
- Amendments and schedules;
- Waivers and notices;
- Communications between the parties and real estate agents;
- Closing instructions and trust conditions;
- Requests for extensions; and
- Evidence showing which party was ready to complete the transaction.
Documents You Should Preserve
If a dispute develops, preserve the following:
- The signed Agreement of Purchase and Sale;
- Every amendment and schedule;
- The deposit receipt;
- Financing, inspection or status-certificate conditions;
- Waivers and notices of fulfillment;
- Mutual-release drafts;
- Emails and text messages with agents, lenders and lawyers;
- Closing-day documents; and
- Evidence of the seller’s resale and resulting losses.
Frequently Asked Questions
Can the Real Estate Agent Decide Who Gets the Deposit?
Generally, no. A brokerage holding disputed trust money normally requires joint written directions, a settlement or a court order.
Does a Buyer Always Lose the Deposit After Failing to Close?
No. Entitlement depends on the agreement, the reason the transaction failed and which party was actually in default.
Can a Seller Claim More Than the Deposit?
Potentially. A seller may claim proven losses exceeding the deposit, but the facts and agreement must be reviewed.
Should I Sign a Mutual Release?
Only after understanding what legal rights and claims the release will end. It may deal with much more than payment of the deposit.
How Minhas Lawyers Can Help
Minhas Lawyers Professional Corporation assists clients in Mississauga and throughout Ontario with real estate deposit disputes.
We assess the agreement, explain whether the dispute concerns forfeiture, damages or both, and work toward a practical resolution. Where settlement is not possible, we can pursue or defend the appropriate court proceeding.
To discuss your circumstances, contact Minhas Lawyers at (905) 671-9244 or use the contact form on our website.
Disclaimer: This article provides general legal information only. It is not legal advice and does not create a lawyer-client relationship. Every real estate dispute depends on its particular facts.
