Forfeiture of Unpaid Deposit in Real Estate Transaction?

No Turning Back for Buyers: The British Columbia Court of Appeal Confirms that Sellers are Entitled to Unpaid Deposits

A recent decision of the British Columbia Court of Appeal confirms that when purchasers walk away from a contract, they will still have to pay the deposit they had promised. The Court of Appeal rendered this judgment earlier this year in the case of Argo Ventures Inc. v. Choi. In this case the purchaser entered into a contract to buy a piece of commercial real estate. The contract provided for a non-refundable deposit of $300,000.00 payable within ten business days of acceptance. However, about a week later the buyer learned that the property had no development potential and decided to repudiate the contract (meaning he decided to treat the contract as no longer binding). The $300,000.00 deposit was never paid. 

The seller sued for judgment in the amount of the unpaid deposit. The purchaser argued that an unpaid deposit, unlike a paid deposit, cannot be forfeited when a contract is repudiated. 

Deposits: The Basics

Deposits, or down payments, are common in many forms of contractual transactions, particularly real estate. Whether commercial or residential transactions, deposits are included in nearly every contract of purchase and sale. 

Deposits are typically paid upon the formation of a binding contract and are usually held in the trust account of a realtor or lawyer. When the purchase completes, and the rest of the purchase price is paid, the deposit is applied to the purchase price. 

Deposits are intended to encourage parties to complete their contracts. When a buyer breaches the contract after paying the deposit, the buyer forfeits the deposit, even if the amount of the deposit exceeds the actual loss to the seller. Indeed, the current law in British Columbia is that the deposit may be forfeited regardless of whether the seller suffers any damages as a result of the buyer’s breach. For example, if a buyer changes their mind about buying a property after paying the deposit, their deposit will likely be forfeited, even if the seller later sells the property to another buyer for the same price. 

Argo Ventures Inc. v. Choi

In Argo Ventures Inc. v. Choi, the Court of Appeal confirmed earlier decisions of the Court which held that, where a seller has a right to a non-refundable deposit before the buyer repudiates, the seller can sue for the amount of the unpaid deposit. Otherwise, you’d end up with the unfair situation where a buyer who failed to pay a deposit could take advantage of their breach to obtain a better outcome than it would have had they performed their contractual obligation by paying the deposit. Rather than ordering that the unpaid deposit had been forfeited, the Court awarded judgment in the amount of the deposit. The Court also noted that a claim for an unpaid deposit can be characterized as either a claim for damages or a claim for debt. Either way, the result is the same: sellers are entitled to the amount of an unpaid deposit. 

How to Protect Yourself

Unlike many contracts in real estate conveyances, the contract at issue in this case was immediately binding upon signature. There were no subject clauses stipulating that the deposit was not payable, and the contract not binding, until the occurrence of a given event (such as the buyer obtaining financing or completing due diligence investigations to their satisfaction). If you will not want to purchase a property unless certain conditions are met, then make sure the contract is subject to those conditions. If the conditions are not met, and the subjects are not removed, then generally both parties can walk away without a deposit having to be paid.  

Parties can also exclude the current law in British Columbia by using clear words in the contract. For example, a contract might stipulate that if the buyer breaches the contract the deposit is only forfeited to the extent of the seller’s actual losses. 

Frequently lawyers are not involved in negotiating or drafting real estate contracts or in reviewing them until well after the subjects have been removed and the contract is legally binding. However, it is advisable for individuals and companies, particularly those engaging in large commercial transactions, to hire a lawyer to assist at the contract negotiation and drafting stage, or in the very least to review and advise you on the content of the contract before it is signed.