So your real estate deal went firm (unconditional) and on closing day, the buyer didn’t advance funds and the deal didn’t go forward. What happens to the deposit?
The deposit, under the strict terms of the Agreement of Purchase and Sale, is to be forfeited to the seller if the deal doesn’t close. What happens to the deposit, however, isn’t quite that simple. The answer to your question depends on who was holding the deposit in trust: your realtor’s brokerage or your lawyer.
If it’s your lawyer holding the funds, they simply release them to the seller directly as a forfeiture due to the breach of contract.
If the deposit is held by the seller’s brokerage, however, which is most commonly the case, it can only be released by consent of the parties or by a court order.
We usually record the consent of the parties by way of a Mutual Release and Termination that both parties and brokerages sign that releases everyone from any further potential liability, and specifies the amount of the deposit and how it is to be paid out and to whom.
While the breach of contract is clear (the closing day came and the buyer didn’t fulfil their obligations) the buyer’s consent to release the funds isn’t always forthcoming. Sometimes the buyer feels that it wasn’t their fault and that the seller should have given them more time. That position isn’t legally very strong– this is a very clear breach of contract, in a written contract in which “time is of the essence”– but without the buyer’s agreement, or a court order, our brokerage has no authority to release the deposit.
Because it’s time-consuming and expensive to go to court to resolve the issue, the parties will often negotiate a resolution.They may agree to a complete or partial forfeiture or no forfeiture at all. Once we get those instructions, our brokerage will act accordingly and send the deposit in the manner agreed to by the lawyers.
If the parties can’t agree what to do within two years of when the brokerage first deposited the funds in trust (which is also the limitation period for a court proceeding to be commenced in Ontario, by the way), our brokerage has to transfer the funds to our governing body, RECO, under s. 27 of the Real Estate Brokers and Business Act (REBBA). This is because the entitlement to the funds is not clear.
Section 27 of REBBA states:
27. (4) If a brokerage holds money in trust for a period of two years and entitlement to the money has not been determined or is unclear, the brokerage shall pay the money to,
(a) the administrative authority; or
(b) if there is no designated administrative authority, the Minister of Finance.
We have to send RECO information about the purchase with the deposit cheque as follows, because RECO will then provide additional time for the seller and buyer to work it out (I can’t recall off hand if it’s a year or two, but the meter is running):
TRUST MONIES PAID UNDER SEC. 27 (4) OF THE ACT (ENTITLEMENT UNCLEAR):
If parties to an aborted transaction have not taken steps to clarify entitlement to title to the trust money, after 2 years, the brokerage must forward the following to the Real Estate Council of Ontario:
A cheque representing the amount of the deposit payable to the Real Estate Council of Ontario;
A copy of the relevant Agreement of Purchase and Sale and any related documents;
A copy of the trade record sheet related to the transaction;
A copy of the relevant trust account transaction record or records;
Any additional information the brokerage is aware of regarding why entitlement to the trust money has not been determined or is unclear.
If the buyer and seller can’t come to terms about the deposit within that specified period of time, RECO is obliged to transfer the funds to the Minister of Finance. Ultimately, if the issue can’t be resolved, the money is forfeited to the government.
In a lot of “For sale by owner” situations, the buyer is asked to make the deposit payable to the seller’s lawyer, even if the buyer is represented by a realtor.
This is an advantage to the seller, because as noted, if the deal goes firm but doesn’t close, the deposit can be automatically released to the seller by their lawyer as a forfeiture. However, it’s not so great for the buyer, who now loses any negotiating power as to what may happen to that deposit. There may have been a breach of contract, yes, but given the time-consuming delays involved in duking it out in court, and the added layers of complexity as funds get moved from place to place, a lot of times the parties will find a compromise.
So, if you are a buyer, you want the deposit held by a real estate brokerage and if you are a seller, you want it held by your lawyer. The outcome to your question depends on which trust account holds those funds. Hope this helps! (And it’s a great question because we are seeing a 10-15% fall through in deals, many of which are at the point of closing, because of the crazy market we’re in.)