The British Columbia Court of Appeal recently had to consider the forfeiture of a deposit in a real estate transaction.
Here’s the summary in Tang v. Zhang (2013 BCCA) by Madame Justice Newbury:
In conclusion, I suggest that the following general principles may be stated with regard to deposits in the present context:
1. On a general level, the question of whether a deposit or other payment made to a seller in advance of the completion of a purchase is forfeited to the seller upon the buyer’s repudiation of the contract, is a matter of contractual intention;
2. Where the parties use the word “deposit” to describe such a payment, that word should in the absence of a contrary provision be given its normal meaning in law;
3. A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and is not dependant on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price;
4. The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of such an amount that the seller’s retention of it would be penal or unconscionable, the court may relieve against forfeiture, as codified by the Law and Equity Act;
5. A contractual term that a deposit will be forfeited “on account of damages” on the buyer’s failure to complete does not alter the nature of a deposit, but may be construed to mean that if damages are proven, the deposit will be applied against (“on account of”) them. If no damages are shown, the deposit is nevertheless forfeitable, subject always to the expression of a contrary intention.
So, that was the summary of the law of deposits. Likely, this case would be followed in Ontario. Nothing said to the contrary it goes to the seller upon the buyer’s default. It cannot be a penalty. That means the amount is in issue.
Brian Madigan LL.B., Broker