Collecting An Unpaid Deposit #437
If a buyer defaults before a deposit is fully paid, can the seller terminate the Contract of Purchase and Sale and successfully sue for the unpaid deposit money? It depends on the contract.
In Agosti v. Winter1, a standard form Contract of Purchase and Sale2 required a $10,000 deposit, "upon subject removal." No other deposit requirements were added to the standard wording. The purchase price was $280,000. In Clause 2, the standard wording required all deposits to be paid to the brokerage in trust in accordance with the Real Estate Services Act.
The standard contract made time of the essence. It also provided that if the buyer failed to pay the balance due, the seller could terminate the contract, in which case:
|12. ... [t]he amount paid by the Buyer will be absolutely forfeited to the Seller ... on account of damages, without prejudice to the Seller's other remedies.|
Upon subject removal, the buyer failed to pay the $10,000 deposit and then told the sellers that she would not proceed with the purchase. The sellers terminated the contract and sold the property to another purchaser for $275,000, being $5,000 less than the first deal. The sellers then sued the buyer for the unpaid deposit and general damages. In a summary trial, the sellers sought judgment for the unpaid deposit.
The buyer claimed that since the sellers terminated the contract, they could not now rely on it to collect the unpaid deposit. According to the buyer, the sellers could only claim general damages, which in this case were $5,000, being the seller's loss on the re-sale of the property.
When one party breaches a fundamental term of the contract, the innocent party may treat the breach as repudiation, terminate the contract and sue for damages. Both parties are then discharged from further performance of the contract. The innocent party, however, retains any rights acquired up to that time. If, at the time of repudiation, the seller has acquired the unconditional right to a deposit that remains unpaid, the seller may collect it.
In Agosti, the British Columbia Court of Appeal dismissed the seller's claim for the unpaid $10,000 deposit. Unless otherwise altered, the standard contract does not give a seller an unconditional right to the deposit when repudiation occurs. The standard contract does not say a seller is absolutely entitled to the deposit if the sale does not complete.
In the court's view, if the sale does not complete, the standard contract does not make the deposit non-refundable or forfeit it automatically to the seller. Instead, the standard wording permits a seller to claim the deposit on account of its damages. The court said that, "If the damages are less than the deposit, the Seller is not entitled to the excess, but it is returned to the Buyer."3
In Agosti, the sellers were entitled to payment of the deposit when the subjects were removed. The standard contract said the deposit would be held by the brokerage or paid into court, pending resolution of the sellers' claim. The amount forfeited to the sellers would be "the amount paid by the Buyer ... on account of damages." Assuming the sellers proved their $5,000 in damages, that is the amount of the deposit that would be forfeited to them.
Given the standard contract, if upon a buyer's default, a seller wants the ability to terminate the deal and recover any unpaid deposit, the better practice is to give the seller an absolute right to the unpaid deposit by adding words making the deposit non-refundable.4
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