The Deposit is NOT Consideration in a Real Estate Deal
The deposit is simply a contract term. It is not consideration. It is not an essential contract element.
We have a valid contract, if we have either of two items:
1) Seals, or
The Courts need to figure out whether there is an enforceable deal, or whether the parties are just talking. If they are still just talking, then at best we have a gift, a discussion, an offer an invitation to enter into a contract, but clearly we are still at the stage where we don’t have a deal.
If both parties affixed their seals to the paperwork, then obviously, this was intended to be a contract between them. That’s the purpose of the seal, to confirm that the paperwork is a contract, it is an enforceable agreement between the two parties. If they didn’t want it to be a contract, then they wouldn’t have used seals. That’s what seals are for!
Consideration may take one of two forms. It may be money, or it may be a promise. To create a legal document, most authors will start the contract document with the words: “In consideration of the sum of two dollars and such other good and valuable consideration, the sufficiency of which is hereby acknowledged ,,,,, the parties agree as follows…”.
Courts will accept any amount of money as evidence of the deal. That was the first part, and it would be sufficient. Then, there is a reference to the “other consideration”, that’s the promise for the promise. That’s sufficient too.
Real Estate Contracts (OREA Forms)
There are seals which are already in place. We are just waiting for signatures.
There is no general reference to the “sum of two dollars” which is typical in other commercial contracts. When it comes to money, this is the real price, the full value for the property will be set out. Let’s assume, that’s $500,000.00.
There are also two promises made, which make it clear that a contract was intended:
1) Buyer: I agree to pay the price, if you convey the property,
2) Seller: I agree to convey the property, if you pay the price.
If both parties sign, then we have a deal. This is no longer a topic of discussion; this is a contract. Without the second signature, this was “just talk” and they were still negotiating.
One Sided Binding Agreement
Until both parties sign and there is “consideration” meaning promises or money are flowing both ways, we really can’t enforce anything.
That’s problematic. So, by adding the seal, the Buyer’s Offer becomes irrevocable until expiry. The seal affixed was good enough to show that the Buyer intended to be bound by his own promise. That’s the purpose of the seal. It was to show that the “Buyer was a man of his word”, “he can be trusted” and “his word is his bond”.
Consequently, a Seller knows that if he accepts an Offer from a Buyer “under seal”, the Buyer cannot turn around and say “too late”.
Deposits are Just Contract Terms
The issues associated with deposits and the confusion arising as to whether they are part of the consideration, probably occurs since they are commonplace and raised at the time of contract formation.
First, they are simply contract terms. Second, they are not required at all. The contract was “formed” with or without the deposit.
It was the promise to buy the property that was the consideration. Actually, paying for it on closing and using the deposit moneys at the time as a credit towards the purchase price is simply another contract term.
If we had a $25,000 deposit to be paid $10,000.00 upon acceptance and a further $15,000.00 upon satisfaction of the conditions, there’s no money upfront. If neither sum were paid, we have the first breach of contract in 24 hours and the second breach at the time of satisfaction of the conditions. So, we have the breach of two contractual terms by reason of non-payment of the deposit.
With deposits, they are held by a third party stakeholder in trust for the two parties to a contract. They are credited towards the purchase price upon successful completion and returned to the Buyer if contractual issues are not fulfilled or in the case of the Seller’s default. In the case of the Buyer’s default the deposits are delivered to the Seller.
Clearly, the deposit is a contractual term. The deposit is a pre-liquidated sum that is an estimate of the minimum loss that the Seller will suffer if the Buyer is in breach. The Seller doesn’t have to prove any financial loss to recover the deposit.
If we go back to contract formation, there were three promises in terms of money payment:
1) Deposit $10,000.00,
2) Deposit $15,000.00,
3) Balance of $475,000.00 on closing.
You might say that the deposit was part of the consideration, but that’s not quite true.
The contract was “formed” when the Buyer promised to pay $500,000.00 and the Seller agreed to convey the property for that price.
Assuming a 90 day closing, there’s no payment until closing. If the deal gets closed the money from the two deposits will be credited towards the purchase price at that time.
However, when the contract was formed, there were no deposits. The first deposit was not even due until the next day.
What we did have was a “promise for a promise”; full payment in exchange for the property.
Deposit paid “herewith”
It’s still possible, of course to have a deposit that is paid “herewith”, that means “now”, right with the Offer. The actual deposit is turned over. Is that consideration?
The difficulty with that is that:
1) The money is paid to a third party,
2) In trust for the parties,
3) To be held pending the eventual outcome of the agreement.
As a result, even deposits paid right at the same time as contract formation are not part of the consideration.
Two Dollars as Consideration
You could have that “sum of two dollars” and that would be consideration. It would be “money paid”. It would be delivered to the Seller as part payment of the purchase price. No stakeholder, no trust provisions, just simply we would have a pre-payment and that would then be consideration.
The straightforward conclusion is that the deposit is not consideration for the purposes of contract formation.
Brian Madigan LL.B., Broker