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Ask the Expert: What Happens to My Deposit if I Cannot Close My Purchase?

Q: What happens to my deposit if I cannot close my purchase?

A: Whenever a buyer makes an offer for the purchase of real estate the contract provides for a deposit. The deposit is normally around 5 per cent of the purchase price and in most instances is payable within a day or two of removal of any subjects. The standard subjects are subject to financing and inspection. Where the property is strata titled there will also be subjects for satisfactory review of such items as strata minutes, engineer’s reports and depreciation reports.

The reason for a deposit is to secure the buyer’s commitment to purchase the property on the completion date. If there is no deposit, a buyer who has “buyer’s remorse” about the property purchase may decide not to complete as the risk of a lawsuit from the seller may be small. If there is a deposit most buyers are not prepared to simply walk away from their deposit.

But a buyer who decides not to close on a purchase may be risking more than just the deposit. The standard Contract of Purchase and Sale provides that the deposit is forfeited to the seller if the buyer fails to complete regardless of whether or not the seller suffers any damages from the breach of contract.

However, there could be significant damages, particularly if the seller is dependent on the sale of his or her property in order to complete on the purchase of a replacement property. Let’s assume that the seller is selling a current home for $500,000 and has entered into a contract to buy a property for $1 million. The buyer of the seller’s current home has paid a deposit of $25,000 and the seller has paid a deposit of $50,000 on the home the seller intends to buy. If the buyer of the seller’s current home fails to complete the purchase the buyer will be liable for at least $50,000, not just the $25,000 deposit.

There are many other costs that may arise for a seller when a buyer fails to complete, including lawyers’ and court costs, so a buyer needs to seriously consider the consequences of a failure to complete under a contract to buy real estate.

Richard Bell B.A. LL.B.