Can a Purchaser Lose Their Deposit If They Fail to Close Their Real Estate Transaction?

Can a purchaser lose their deposit if they fail to close their real estate transaction? When do they have a right to get it back?

It is common practice for a seller to secure a deposit from the purchaser upon the acceptance of the purchaser’s offer. This deposit protects the seller against transactions that fall through due to a purchaser’s failure to close. If a purchaser cannot close on the closing day, the deposit is usually forfeited to the sellers. In addition, the sellers can sue for damages for any losses, such as carrying costs of the home.

However, purchasers can ask the court for relief from forfeiture. This remedy is requested when they feel that losing all or some of the deposit amount to the sellers would be inequitable. The Ontario Court of Appeal established in Varajao v. Azish that in order to obtain relief from loss of deposit, purchasers are required to establish that the deposit would not be proportional to the damages suffered by the seller. The purchaser also needs to establish that it would be unconscionable for the seller to retain the deposit.

Through its decision in Redstone Enterprises Ltd. v. Simple Technologies Inc., the Court of Appeal laid out some factors that could give rise to unconscionability.

  1. Inequality of bargaining power
  2. A substantially unfair bargain
  3. The relative sophistication of the parties
  4. The existence of bona fide negotiations
  5. The nature of the relationship between the parties
  6. The gravity of the breach
  7. Conduct of the parties.
  8. Disproportionately large deposit

In the recent Toronto case of Sinha v. Shabestari, the purchasers put down a $60,000 deposit (5%) on a $1.202 million purchase. Due to an inability to secure financing, the purchasers were unable to close on the transaction and the sellers kept the deposit. The sellers then resold their property at $1.273 million, which was $71,000 more than the original sale price. The original purchasers then sued to get their deposit of $60,000. The purchasers argued that it would be unconscionable for the sellers to keep their deposit due to several factors, such as their limited understanding of English, being pressured to make an unconditional offer, and their agent’s handling of the transaction.

The court decided in favour of the sellers, thus allowing them to keep the deposit. In its decision, the Court established that just because the property was resold for a greater price than the original sale price, that itself was not evidence of unconscionability. Additionally, the Court decided that the deposit amount was not disproportionately large to be considered unconscionable.