3 Reasons for the Deposit
The deposit is not consideration in a transaction. It’s not like the nominal “$2.00 and other good and valuable consideration that is used for a Transfer”.
The Deposit is designed for three purposes:
- To provide motivation the Buyer to complete the deal,
- To provide a pre-estimate of the Seller’s loss, if the Buyer defaults, and
To provide security for the performance of the Buyer’s obligations.
From the Buyer’s Agent’s perspective, the deposit can be zero. Who cares!
From the Seller’s Agent’s perspective, that is entirely another matter. Courts have frequently endorsed deposits in the range of 4.5% to 7.5%. That range meets the three objectives. It really needs to be enough to provide the Buyer with an incentive to close the deal.
Leaving something which is the equivalent value of a dinner for two is hardly suitable for a million dollar deal. And, from what I understand there are million dollar deals all over the Province.
I do hear that agents from small, remote, rural areas say:
“all we do here is $500.00 to $1,000.00”.
Does that make any sense?
The laws are the same all over the Province of Ontario. Much like the Highway Traffic Act and the Criminal Code, there is absolutely no difference throughout the Province when it comes to the law of deposits. Now, the application, seems to vary somewhat. You know that there are stretches of the 401 where traffic runs at 140 km/hr. They are pushing the limits, as are the Listing Agents running with $500.00 on a million dollar deal.
Basically, it speaks of negligence or even gross negligence in the provision of professional services, effectively a breach of fiduciary duties, which means no commission at all in the deal.
The way to get around it; is permission from the Seller, but once the Seller has been advised of the consequential risks, they will usually request a higher deposit.
Inherently, that’s the problem. In a slow market or a Buyer’s market, the request for a higher deposit will not go unchallenged. But, there are slow markets and Buyer’s markets all over the Province!
The potential solution is the two phased deposit, $1,000.00 with the Offer and the balance immediately before closing. This arrangement meets the first two reasons for the deposit, but not the third, which, of course, is still OK.
So, if you need a $25,000.00 deposit, and you are in a $1,000.00 area, consider:
- $1,000.00 with the Offer, and
$25,000.00 immediately before closing.
Brian Madigan LL.B., Broker