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Over the past few months we are seeing more scenarios where a buyer, having their offer to purchase real estate accepted, will not pay the deposit and then try to walk away from the deal. Whether due to buyer’s remorse, or because a buyer submits offers on multiple properties and then moves forward with only one of them, the argument typically made by the buyer is “if the deposit wasn’t paid there is no binding agreement”.

Buyers beware – this is not true.

A deposit isn’t required as consideration

Contract law provides that, for an offer to be binding, there must (in most situations) be consideration. No deposit no consideration, right? Wrong. The deposit is not the consideration that creates a binding real estate agreement. The consideration of a real estate deal is the promise to transfer the property to the buyer in exchange for the buyer promising to pay the purchase price.

Even if the deposit was needed for there to be consideration, that still doesn’t help a buyer as most real estate agreements are signed under seal (see, for example, the standard forms of Agreement of Purchase and Sale published by the Ontario Real Estate Association), and if an agreement is signed under seal the agreement doesn’t need consideration to be binding.

Failing to pay a deposit on time is a fundamental breach of the Agreement of Purchase and Sale 

When the buyer unilaterally decided not to abide by the terms of the Agreement by not paying the deposit, the buyer is in breach of the Agreement and that breach gives the Seller certain rights. The seller can choose to rescind the Agreement, seek specific performance (that is, have a Court make the buyer complete the transaction), or pursue damages. The seller can also let the buyer pay the deposit late and keep the transaction alive, although the seller has no obligation to do so.

What happens if the seller can resell the property for more?

Courts have held that deposits by their nature are an estimate of liquidated damages to be paid should the buyer breach the terms of the Agreement. Even if the seller doesn’t suffer any loss, the seller can still sue a buyer who didn’t pay the deposit for the amount of the deposit, and based on the case law of today the seller will likely have a very good chance of success.

If you’re a seller, speak to a lawyer right away if this happens to you, and don’t sign a Mutual Release. If you sign a Mutual Release you are giving up your right to sue the defaulting buyer.

If you’re a buyer, don’t assume that by failing to pay the deposit you can simply walk away from a deal.

Matthew Wilson practices with the Siskinds Real Estate Law department. If you have questions about the information contained within this article or any other real estate questions, please write to [email protected] or call 519.660.2061.

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