What Happens to my Deposit if I get Cold Feet?

Interesting question!

The typical conditions in a house deal are home inspection and financing. These clauses usually state the buyer has the sole and absolute discretion to decide whether the home inspection report, or the financing, are satisfactory to them. If not, the deal is null and void and they get their deposit back. In that situation, both parties sign a Mutual Release and Termination (this is also signed by the real estate brokerages representing them), and the deposit is released in full without deduction to the buyer.

This  gets a lot trickier, however, where a buyer doesn’t take reasonable steps to fulfill the conditions or simply gets cold feet and walks away.

I recently had a situation where a buyer took no steps to  book a home inspection within the time period agreed to because they wanted to find out if they would get financing first.  I pointed out to their agent (after confirming my view with my client’s lawyer and my manager) that this could result in them forfeiting their deposit. It may seem clever to hold off on booking a home inspection until you know if you’re going to get financing  and save the cost, but it can get you into trouble. Every real estate deal has a clause in it that says “time is of the essence.” If you don’t get financing and didn’t even bother to book an inspection, you may not be acting in good faith.

The leading Ontario case on this is Greenberg, in which the court found that a contractual exercise of sole and absolute discretion must be exercised with honesty and good faith. This requirement was applied to a real estate deposit in a case called Marshall v. Bernard Place Corp.  While the court found no evidence of bad faith and ordered the deposit released, the Ontario Court of Appeal confirmed the buyer’s discretion when dealing with these types of conditions has to be exercised in good faith, honestly, and reasonably.

In Coghlan v Unique Real Estate Holdings Inc., a 2016 Ontario Superior Court decision, the seller applied for forfeiture of the deposit, and asked that the court direct the deposit be paid to him. He applied to a motions court on summary judgment (that’s where the court makes a decision without a trial). He argued the buyer hadn’t acted in good faith by relying on conditions, but instead had cold feet.

The court agreed. It held that even though the contract didn’t refer to forfeiture of the deposit in these circumstances, it didn’t have to — it was implied. It ordered that the deposit be forfeited to the seller. A deposit, the court said, was “earnest money,” and indicated that the buyer intended to be bound by the contract. The court quoted from Marshall:

The Agreement of Purchase and Sale does not provide that the deposit will be forfeited in the event that the Purchaser fails or refuses to complete the transaction. However, when the payment is a deposit, it is not necessary to include a provision in the contract. Unless the contract taken as a whole shows an intention to exclude forfeiture, the vendor is entitled on default of the purchaser to retain the deposit.

A deposit is considered to be “earnest money ” and an indication that the purchaser intends to be bound by the agreement and to complete the transaction. A reasonable deposit is usually considered to be somewhere in the range of three to ten percent of the total purchase price. In the event of default by the purchaser, the vendor is entitled to retain the deposit if the amount is within that reasonable range.

So, at least in Ontario, you can’t just walk away from a deal without doing what you said you would, and think you will get your deposit back.

The listing brokerage holding the deposit can’t release it without a Mutual Release and Termination, which as I noted, has to be agreed to by the seller. If the seller won’t sign because they think you have acted in bad faith, then the listing brokerage has to hang on to it until they are provided with a court order or a written agreement between the parties or something in writing from the parties’ lawyers directing how the money is to be paid out.

Does that mean the seller has to go to court to get the deposit?

They can, but they don’t have to. According to the lawyer I spoke with, they can do nothing, and simply refuse to sign the Mutual Release and Termination. That forces the purchaser to either apply to the court for the deposit to be returned (and prove they acted in good faith throughout) or reach agreement with the seller on  how the deposit will be dealt with. Given the expense of court proceedings, I suspect most of these situations are resolved with an agreement reached between the parties’ lawyers as to how to deal with the deposit.

The important thing is to realize  is that an “absolute discretion clause” doesn’t give you  an automatic right to get your deposit back unless you’ve held up your end of the bargain. So get your cold feet out of the way before you sign the deal – and be sure to book your home inspection right away.

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