In real estate transactions, it is standard practice for a buyer to provide a real estate deposit as a guarantee, incentivizing the completion of the sale. However, what happens to the deposit if the sale falls through? More importantly, who gets the deposit when a house sale falls through, especially if it is not the buyer’s fault?

Who Gets the Deposit If a Real Estate Deal Falls Through?

When an agreement of purchase and sale is repudiated—meaning one party chooses not to fulfill their obligations under the contract—the determination of deposit forfeiture typically depends on which party is at fault.

If the Buyer Is at Fault: Do You Lose Your Deposit?

Deposits are typically security for the buyer’s performance of the contract. If the buyer backs out of the deal, the seller is usually entitled to keep the deposit as compensation for their lost opportunity.

In Azzarello v. Shawqi the Ontario Court of Appeal stated “[it] is well-established by case law that when a purchaser repudiates the agreement and fails to close the transaction, the deposit is forfeited, without proof of any damage suffered by the vendor”.[1]

Even if an agreement does not explicitly state who gets the deposit if a purchase agreement is canceled, the law presumes that the deposit is forfeited by the at-fault buyer, unless there is a basis to challenge this presumption.

If the Seller Is at Fault: Can You Get Your Deposit Back?

If the seller backs out of the sale, the buyer is entitled to receive their deposit back. In most standard agreements of purchase and sale, this is explicitly stated.

In Kalis v. Pepper, the Ontario Superior Court was tasked with determining which party in a failed home purchase was entitled to keep the deposit. Ultimately, the deposit was returned to the buyer due to a lack of clear evidence that the buyer has repudiated the agreement.[2]

Exceptions to the General Rule: Can You Challenge Deposit Forfeiture?

While the above assumptions apply when determining who gets to keep a deposit in a failed real estate transaction, the default outcome may be overridden in some circumstances. If parties have specifically negotiated an alternative outcome for what will happen to the deposit in the event of a breach, and it is reflected in their agreement of purchase and sale, then courts will often respect that clause.

Additionally, the courts have the discretion to displace the presumption that the non-breaching party will be entitled to the deposit. Section 98 of The Courts of Justice Act provides “[a] court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise are considered just”.[3] The court has exercised this discretion in circumstances where the amount of the deposit is disproportionately larger than the harm suffered as a result of the transaction failing, or in instances of unconscionability (where the agreement is the result of substantial unfairness and inequality of bargaining power).[4]

For example, in Lucas et al v 1858793 ON the court ruled that the buyer did not have to forfeit its $90,000 deposit on the purchase of a condo unit because that amount was “grossly disproportionate to the harm if any, that the [seller] suffered”.[5] Further, the Application judge felt the seller had only used the breach of the contract (allowing a friend to live in the unit for free – which the seller claimed was leasing the unit without their consent, contrary to their agreement) as an excuse to terminate the agreement before closing and keep the deposit.

Determining which party is “at fault” depends on the facts of each transaction and the steps taken by the parties leading up to closing. If you’re having a dispute over a deposit on a purchase, or if you were involved in a failed real estate transaction, please contact Graeme Oddy at (416) 446-5810 or Graeme.Oddy@devrylaw.ca for more information.

This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.

This blog was co-authored by Chloe Carr*

[1] Azzarello v Shawqi, 2019 ONCA 820 at para 45.

[2] Kalis v Pepper, 2015 ONSC 453 at paras 13-14.

[3] Courts of Justice Act, RSO 1990, c C 43, s98.

[4] Uber v Heller, 2020 SCC 16.

[5] Lucas et al v 1858793 Ontario Inc. o/a Howard Park et al, 2020 ONSC 964 at para 55.