Suing for the Unpaid Deposit
Bob submits an Offer on Bill’s property for $890,000 with a $50,000.00 deposit, which Bill accepts.
One little problem: Bob fails to pay the deposit.
The Offer said “upon acceptance”, so the deposit had to be provided within 23 hours and 59 minutes and 59 seconds of that time.
We are now 5 hours past the delivery time.
Martha is also interested in Bill’s house. She submits an Offer for $950,000.00 with a $100,000.00 certified cheque for the deposit. The closing date is the same.
- Does Bill need a mutual release from Bill before he can look at Martha’s Offer?
- Does Bill need a mutual release from Bill before he can accept Martha’s Offer?
- Does Bill have to state in a conditional clause in a Counter-Offer to Martha that he requires a release from Bob, and if he gets it, then he can proceed with Martha’s deal?
The answer to all three (3) questions is “no”.
Bill is free to deal with Martha directly without Bob’s involvement the moment the time limited for delivery of the deposit expired. At that point, Bob was in breach of contract. Bill was free to deal with Martha, as soon as he terminated the contract with Bill.
Bill may now sue Bob for the amount of the deposit. In most cases, the deposit would reside in the trust account of the real estate brokerage or the lawyer.
In this case, there is no financial security for the deposit, but there still is a deposit clause in the Agreement and it’s $50,000.00.
This sum of money is the pre-liquidated sum of money that the parties chose to be Bill’s minimum loss and Bob’s forfeiture in the event of breach of contract by Bob. This was the minimum amount selected by the parties to the contract. This is the amount of the agreed upon loss without proof of damages. It’s enforceable even without payment. The contract was legally binding by reason of the mutual exchange of promises and the seal.
Never mind whether it’s paid or unpaid, the pre-determined and selected loss is $50,000.00, no proof of damages is required.
Bill may bring an Application in the Superior Court of Justice to obtain Summary Judgment. He has to:
- Prove that there was a contract,
- Prove that the contract specified a deposit of $50,000.00,
- Prove that Bob was in breach of contract by reason of his failure to pay the deposit within the prescribed time.
Really, there’s no defence to this! If there’s anything close to a “slam-dunk”, this is it.
And, remember, Bill didn’t lose any money here. He sold to Martha for $60,000.00 more than he sold to Bob.. But, he still gets a Judgment for $50,000.00 against Bob.
The only difficulty is collecting the $50,000.00 afterwards. If Bob doesn’t have the money it will be difficult to collect, but Bill could seize all of Bob’s assets and garnishee his wages until the debt is fully satisfied, with interest and with costs.
Why all the Uncertainty?
The law in this area was somewhat unclear. Lawyers had their opinions, but there was no definitive case on point. This changed when Mr. Justice Rutherford concluded that a purchaser was in breach of contract by failing to deliver the deposit “in time”.
That decision was rendered in the Superior Court of Justice: Motions Court on 21 February 2005. There should have been no uncertainty after that, however, the decision was placed under appeal.
Finally, Justices Feldman, Gillese and LaForme of the Ontario Court of Appeal upheld Mr. Justice Rutherford’s decision on 26 July 2005.
There was no further appeal to the Supreme Court of Canada.
The law was made quite clear by the highest Appeal Court in Ontario, namely the Ontario Court of Appeal on 26 July 2005.
Here is the headnote from the case in the Ontario Court of Appeal:
“Sale of land -- Time of essence -- Purchaser under agreement of purchase and sale of land required to pay deposit within five days of acceptance -- Time expressed to be of essence -- Through inadvertence purchaser failing to pay deposit within time stipulated by agreement -- No waiver of breach by vendor -- Vendor entitled to treat agreement of purchase and sale at an end -- Purchaser's claim for specific performance dismissed on vendor's motion for summary judgment.”
Have a look at 1473587 Ontario Inc. v. Jackson, by Mr. Justice Rutherford, affirmed by the Ontario Court of Appeal, see:
There are still many lawyers and real estate agents who are unfamiliar with this case. They still believe that the law is what they thought it to be on 25 July 2005.
I am not quite sure what it will take to change their minds.
They would still counsel Bill to get a mutual release from Bob before accepting Martha’s Offer, or at the very least have a clause in the agreement with Martha making her contract conditional upon Bill being released by Bob.
That gives a lot of power to Bob, in the circumstances, and remember that he is the “deadbeat” here. Also, it’s unwise. Bill might lose the opportunity to accept Martha’s better Offer. Counselling Bill incorrectly could place a real estate estate agent in difficulty.
Brian Madigan LL.B., Broker