When the Sale Falls Through: What Happens to the Deposit in Ontario?
In Ontario, a real estate deposit is more than just a gesture of good faith—it's a legally significant part of the Agreement of Purchase and Sale (APS). But what happens when a buyer fails to close the deal? Does the seller automatically get to keep the deposit? What are the legal consequences?
What Is the Purpose of the Deposit?
The deposit, is paid by the buyer at the time the APS is signed or shortly thereafter. It serves several purposes:
Demonstrates the buyer’s commitment to the purchase
Provides the seller with some security if the buyer defaults
Acts as part payment of the purchase price if the deal closes
The deposit is usually held in trust by the listing brokerage until the deal either closes or is formally terminated.
When a Buyer Backs Out After the Conditional Period
When a buyer decides to back out of a real estate transaction after the rescission or conditional period has expired, the situation becomes more legally complicated. At this point, the deposit—usually held in trust—is at stake. Deposits are meant to signal the buyer’s seriousness in completing the transaction and compensate the seller for taking their property off the market.
If a buyer defaults without a lawful excuse, the seller may be entitled to keep the deposit as compensation. However, disputes over entitlement to the deposit can arise, especially if the buyer seeks relief from forfeiture or if the parties disagree on whether a true default occurred. In some cases, sellers may pursue additional damages, such as the shortfall in resale value, carrying costs, and other losses incurred as a result of the failed transaction.
These situations highlight the importance of clear language in the APS and the need for legal guidance to navigate the aftermath of a collapsed deal.
Best Practices for Sellers
Sellers should always seek legal advice before taking steps to claim or release the deposit, especially where the buyer has failed to close. Acting without legal guidance can create additional risk or even weaken the seller’s position. Sellers should also take reasonable steps to mitigate their damages by promptly re-listing the property if a sale falls through. This shows good faith and can strengthen any claim for damages. Finally, sellers should weigh the cost and benefit of pursuing the deposit through litigation, particularly where the deposit amount is modest relative to potential legal fees.
Best Practices for Buyers
Buyers must understand that backing out of a deal after waiving all conditions can lead to forfeiture of the deposit, and potentially expose them to additional claims for damages. If problems arise—such as issues with financing or inspection—it is important to communicate with the seller and their agent as early as possible. In some cases, an extension or mutual release may be negotiated. Buyers should also be aware that failing to close may have long-term consequences beyond just the deposit, including being sued for the difference if the seller resells at a lower price. Legal advice can help buyers assess their options and minimize their risk.
Mutual Release: A Path to Resolution
In situations where a transaction falls through, the parties may choose to sign a Mutual Release. This is a written agreement, usually facilitated through the real estate agents or lawyers, in which both the buyer and seller agree to release each other from any further claims under the Agreement of Purchase and Sale. It typically also addresses the release and return of the deposit, specifying whether it will be returned to the buyer, forfeited to the seller, or shared in some agreed-upon manner.
A Mutual Release can be an efficient and amicable way to resolve disputes without litigation. However, it is important to understand that once signed, it generally waives both parties' rights to pursue any further legal claims. Therefore, legal advice should be obtained before signing to ensure your interests are protected and that the terms of the release are fair.
Final Thoughts
A failed real estate transaction can be stressful and costly for both buyers and sellers. The deposit plays a central role in what happens next, but it is not always as simple as "the seller gets to keep it.”
Legal advice is essential to understand your rights and options. If you are dealing with a collapsed real estate transaction, contact our office to speak with an experienced real estate lawyer who can guide you through the process.
Author:
Rina You
Partner
e: ryou@realtycarelaw.com