Brian Madigan LL.B., Broker
BRMadigan@iSourceRealEstate.com

RE/MAX West Realty Inc.,
Brokerage
Independently owned and operated

96 Rexdale Blvd. 
Toronto, Ontario 


Phone: 416-745-2300
Toll Free: 1-888-507-0817

 

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Deposits - Selecting the Right Clauses

April 7, 2016 - Updated: April 8, 2016

Payment of the Deposit and Selecting the Correct Clause

 

From time to time agents run into problems with the deposit clause in the standard Form OREA Agreement of Purchase and Sale.

 

OREA Deposit Clause

 

This is what it says (2016 version):

 

“DEPOSIT: Buyer submits ..................................................................................................................................... (Herewith/Upon Acceptance/as otherwise described in this Agreement) .....................................................................................................................................Dollars (CDN$) .......................................... by negotiable cheque payable to ............................................................................................................................

 

“Deposit Holder” to be held in trust

 

pending completion or

 

other termination of this Agreement and

 

to be credited toward the Purchase Price on completion.

 

For the purposes of this Agreement, “Upon Acceptance” shall mean that the Buyer is required to deliver the deposit to the Deposit Holder within 24 hours of the acceptance of this Agreement.

 

The parties to this Agreement hereby acknowledge that, unless otherwise provided for in this Agreement, the Deposit Holder shall place the deposit in trust in the Deposit Holder’s non-interest bearing Real Estate Trust Account and no interest shall be earned, received or paid on the deposit.”

 

Review

 

There are obviously a few questions here:

 

When is it paid?

By what means?

How much?

To whom?

Is interest payable?

 

When is it paid?

 

There are three choices provided in most standard forms and software programs:

 

1)    Herewith, that means now, with the Offer,

2)    Upon Acceptance, that means within 24 hours of acceptance, and

3)    As otherwise provided, this means it will have to be set forth in Schedule “A”.

 

If you were to enter a bidding war, then the fact that your deposit is there and ready to go will be an important consideration. For bidding wars, always select “herewith”.

 

Upon acceptance has an extended definition. It means within 24 hours, so that is 23:59:59 hours. Twenty four hours exactly, would be one second too late!

 

This could be crucial since the Agreement of Purchase and sale contains a “time is of the essence” clause. Being late, is being in breach of contract. If there are other interested parties, you want to make sure that the Seller has no reason to terminate the Agreement. If you are late, the Seller could instruct his Agent not to accept the deposit. It’s too late, you are already in breach and the Seller is intending to proceed with another Buyer.

 

So, you will have to calculate precisely WHEN, that deposit is due. Look to the Confirmation of Acceptance. What time does it say? Is that time correct? Calculate 23:59:59 hours and proceed.

 

Also, it would perhaps have been advisable to provide an uncertified cheque at the time of the Offer, followed by a replacement certified cheque. This way, you are not missing any time periods.

 

As otherwise provided should be the “go to” choice. The main reason is that it gets you past the 24 hour limit, which at times can present something of a challenge. What about weekends and holidays? What about the office hours of the Listing Brokerage? If you strike a deal on Saturday night at 8:00 pm, you really don’t have until 7:59 pm on Sunday. First, many banks are closed and many Brokerages are closed by 3:00 pm. You don’t want to be in breach. The solution, of course, was to pick Monday in the first place. That time and date should have been set out in Schedule “A”. It should not be an afterthought.

 

By what means?

 

It says negotiable cheque. That basically means any kind of cheque, as long as it is not “post-dated”. It has to be available for “presentment”.

 

Really, the best choice is a certified cheque or banker’s draft. These are pre-paid and arranged through the Buyer’s banker. If it will take a day or so to obtain, provide a cheque followed by the replacement certified cheque. This way, you will not be in breach.

 

How much?

 

This should be 5% or more, perhaps as high as 10%. If you were purchasing a pre-construction condo, this might be as high as 20%.

 

The $1,000.00 deposit is foolhardy. Not a problem if you are a Buyer, but a very, very significant problem if you are a Seller.

 

The deposit is for two specific reasons:

 

1)    It is financial security for the transaction,

2)    It is a pre-estimate of the Seller’s liquidated damages in the event of default.

 

The Seller should ALWAYS get a sizeable deposit. It is not a matter of trusting people. A low deposit is generally a sign of a lack of recognition of the two points above.

 

Let’s look at two one million dollar deals that fell through at the last minute due to the Buyer’s default. One has a $50,000.00 deposit and the other has a $1,000.00 deposit. In the first case, the Seller keeps the $50,000.00 and still has the right to sue for more, if his losses were greater than $50,000.00.

 

In the second case, the Seller keeps $1,000.00! This isn’t even worth it. It’s just as easy to be gratuitous and give it back. You need a lawsuit to get anything worthwhile.

 

I should also mention that the 5% that I recommended has nothing at all to do with the real estate commission.

 

Is that commission payable even if the deal fell through?

 

Also, the law is the law everywhere in Ontario. Million dollar properties are located everywhere in Ontario. The same banks do business all throughout the Province. It’s no excuse to say, “we just use $1,000.00 deposits because we all trust one another here…”. That’s just naïve and cavalier. Those days have long since come and gone.

 

To whom?

 

The preferred choice would be a Listing Brokerage which is covered under the RECO insurance policy.

 

Assuming, that the Seller is unrepresented, then, this could be the Buyer’s Brokerage (also covered by RECO), failing which in either case, the Seller’s lawyer could hold it in trust.

 

The funds should never be paid to the Seller. That money is gone. It’s unlikely that it would be held in trust at all.

 

Is interest payable?

 

No interest!

 

That’s what the Form says. If you want interest, then you will have to specify that in the Offer. Schedule “B” may not be enough. That may only say that the Listing Brokerage has a trust account which pays interest. It doesn’t say that your client is getting any interest on their deposit.

 

This needs to be specified. It should be set out in Schedule “A”.

 

In other circumstances, the Listing Brokerage may just assume that the Buyer is to get interest, and will pay it. However, be careful here and specify the entitlement to interest.

 

And, don’t forget about the deposit return. Sometimes, deals fall through and frequently the Agreement provision will say something like “ … the Agreement shall become null and void and the deposit shall be returned to the Buyer forthwith without interest.” If that’s your standard form clause, then you should change it to “with interest”.

 

Be careful, sometimes things can be trickier than you think.

 

Brian Madigan LL.B., Broker

www.iSourceRealEstate.com


Tagged with: deposit clause orea agreement certified cheque interest amount stakeholder ontario law
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Brian Madigan LL.B. Broker

RE/MAX West Realty Inc. Brokerage

Independently owned and operated

96 Rexdale Blvd. , Toronto Ontario,

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