When a purchaser fails to close on a real estate transaction, any deposit made towards the purchase will be automatically forfeited even where the seller suffered no loss. As a result, the purchaser may be losing out on tens or even hundreds of thousands of dollars.

The purpose of a deposit undergirds this strict rule and application. Canadian case law has consistently held that deposits are a separate legal device which attempts to guarantee that the purchaser closes. When a deposit is made towards the purchase of real estate, it serves as security for the purchaser’s performance of the contract and compensates the seller for the losses arising from the purchaser’s failure to close. The forfeiture of deposits thus serves as a strong incentive for the buyer to close the transaction.

Despite the general rule, s. 98 of the Courts of Justice Act provides courts with the discretionary power to grant relief from forfeiture where it would be considered just.^[1] Courts have exercised their discretion to grant relief in the context of real estate deposits; however, the decision whether to exercise their discretion in Deposit Cases relies on the purchaser meeting a two-step legal test.

The Two-Step Legal Test to Grant Relief from Forfeiture in Deposit Cases

The generally applicable test for relief from forfeiture in deposit cases is taken from the English Court of Appeal case of Stockloser v. Johnson,^[2][3] and is as follows: ^[4]

• Is the forfeited deposit out of all proportion to the damages suffered?
• Would it be unconscionable for the seller to retain the deposit?

Where the answer to both prongs of the legal test is “yes,” then the court should exercise its discretion to grant relief from the forfeiture of the deposits.

Is the forfeited deposit out of all proportion to the damages suffered?

The first step of the legal test is relatively straightforward and requires the court to compare the deposits forfeited to the damages suffered by the seller. If the seller did not suffer any damages or benefited from the failure to close because they were able to resell the property at an equal or higher price, Ontario courts have been quick to find that this stage is met without much difficulty. If the seller did suffer damages, the outcome of the analysis will be fact-specific.

In the Ontario Court of Appeal case of Azzarello v. Shawqui,^[5] the court dealt with a case where the seller suffered losses, and the Agreement of Purchase and Sale called for the deposit to be credited to the purchase price. The court concluded that the deposit was intended to be applied to the purchase price whether on completion or as damages.^[6] The deposit should therefore be treated as part payment for the damages suffered.

If the deposit nonetheless grossly exceeds a reasonable estimation of damages suffered, the court will likely determine the forfeited deposit is disproportionate to the losses suffered.

Would it be unconscionable for the seller to retain the deposit?

Disproportionate forfeited deposits will not necessarily be unconscionable on their own. In determining whether it would be unconscionable for the seller to retain the deposit, Ontario courts will weigh several factors. A finding of unconscionability is rare and will only be made where it is strongly compelled on the facts of the case.^[7]

The first measure courts typically examine is whether the deposit is excessive relative to the purchase price. Courts have been unwilling to specify an exact numerical percentage but have found deposits of 20%, 25% and 28% of the purchase price to be reasonable whereas a deposit of nearly 80% was found to be unconscionable.^[8]

Other measures examined by the court are context-specific, and the list is never closed. In Redstone, the court listed the following factors as useful indicators:^[9]

• Inequality of bargaining power
• Substantially unfair bargain
• Relative sophistication of the parties
• Existence of bona fide negotiations
• Nature of the relationship between the parties
• Gravity of the breach
• Conduct of the parties

One instance where the court did find unconscionability and exercise its discretion was in Naeem v. Bowmanville Lakebreeze West Village Ltd.^[10]

In Naeem, the buyer signed an agreement to purchase a new-build home from the sellers and made a deposit of $82,916.19 towards the purchase. The closing date was postponed several times at the seller’s request, but the buyer ultimately failed to close the purchase. The buyer brought a motion to relieve her from forfeiture of the deposit. The motion was successful, and the builder appealed. On appeal, the Court of Appeal confirmed the motion judge’s decision and highlighted three factors present on the facts. First, the seller was a sophisticated party whereas the buyer was a widow who worked two jobs while undergoing cancer treatment. Second, the seller had apparently not suffered a loss. Third, and most significantly, the seller had deliberately misled the buyer into thinking she had to accept the seller’s new closing dates while knowing that the APS was voidable by the buyer without penalty.

Conclusion

Courts have generally been reticent to make a finding of unconscionability and grant relief. For that reason, purchasers seeking relief from forfeiture of deposits will need to demonstrate a strong and compelling case. Ultimately, due to the discretionary nature of the relief, the outcome is never certain.

If you are seeking legal help in recovering a deposit or are looking for other legal assistance, contact a lawyer at Devry Smith Frank LLP at 416-449-1400 or by emailing info@devrylaw.ca.

This blog was co-authored by summer law student Trevor Herr.

[1] Courts of Justice Act, R.S.O. 1990, c. C.43, s. 98.

[2] [1954] 1 Q.B. 476 (Eng. C.A.).

[3] Outside of the Deposit Case context, courts have applied a multi-factor test from Saskatchewan Rivers. Although some Deposit Cases have also applied the Saskatchewan Rivers test, a consensus has formed around the use of the Stockloser test for Deposit Cases. See Gagliardi v. Al-Karawi, 2023 ONSC 6853 at paras 75-77 (Gagliardi).

[4] Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282 at para 15 (Redstone).

[5] 2019 ONCA 820.

[6] Ibid at para 53-54.

[7] Redstone at para 25.

[8] Gagliardi at para 71; Sciluna at para 31.

[9] Redstone at para 30.

[10] 2021 ONCA 383.