Workshop with Brian Madigan, given in April 2020 on Facebook group "Real Estate Legal Discussion for Realtors" hosted by Mark Morris. Note taken by JL.
RELEASES:
- A Seller does not require a mutual release from the 1st Buyer before proceeding to consider a 2nd offer;
- A mutual release would provide too much power to the 1st Buyer in breach of contract;
- A Seller may accept the 2nd offer without notification to the 1st Buyer;
- The two offers are not competing as defined by REBBA, 2002;
- The Seller can sue the 1st Buyer for the deposit amount, even following acceptance of the 2nd offer.
Mutual Release and Direction:
OREA release: Eliminate the right to sue; Involved the brokerage.
Make sure client receives legal advice BEFORE signing a mutual release.
How much should the deposit be?
Rule of thumb: 5% of the purchase price; 4.75% to 7.25%
Buyer: as little as possible;
Seller: as much as possible;
When is it too small?
When it is completely insufficient to provide any motivation to the Buyer to compel the completion of the contract.
When is it too large?
Objectively: 20%
Over 20%-Risky, because the deposit cannot constitute a penalty.
Could be considered a penalty, then it is struck out completely, not reduced to an acceptable level. (Court case:penalty deposit=no deposit)
Law around deposits:
Alert: too much advice from non-lawyers.
Should it bear interest?
Always
If transaction is not completed
Lawsuit could continue for years:
2 years to sue;
1-2 years for discoveries and motions;
1 year waiting for trial;
1 year waiting for appeal;
1 year waiting for further appeal. (7 years in total).
What does a Stakeholder require to release deposits?
Consent;
Court Order.
When is it due?
Herewith: Now;
Upon acceptance: 23:59:59 hours; (court case [loblaw], buyer's agent late 5 minutes in delivering deposits, the seller was able to get out of the deal)
As otherwise specified: consider holidays, weekends, inability to access funds immediately.
What is acceptance:
Execution of the Offer;
Communicating the fact to the Offeree or the Offeree's Representative.
What if it's late by a minute (second)?
Breach of Contract.
"Time is of Essence"
Delivery of Deposits:
Physical Delivery: to authorized rep of the Seller; to Seller personally
Money Transfer: E Transfer; Direct Deposit/Wire
Must it be certified?
No, unless the Agreement specifies it.
Seller can certify it with a 15-20 dollar cost.
What happened if the deposit cheque does not clear?
Breach of contract;
The Seller has right to terminate.
Who gets the deposits if the Seller Default?
Buyer
Subject to the obligation to attend to payment of Commission.
Who gets the deposits if the Buyer Default?
Seller
Subject to the obligation to attend to payment of Commission
Listing Agreement: Commission payable only when the transaction closes.
Or Commission payable on offer.
Purpose of Deposits:
Security for performance of the contract;
Pre-estimate of liquidated damages;
Low Deposit Areas:
Always increase the deposit in low deposit deals before the closing. (rural, Muskoka)
Now it is Seller's loss pre-estimate without proof required
If not paid within time, contract is voidable.
Strategy:
First Deposit: $1,000.00
Second Deposit: $24,000.00 (to be paid immediately before closing)
Total Deposit: $25,000.00
Failure to close: total deposit of $25,000.00 is the pre-estimate of the minimum financial loss the seller will suffer.
Judgment: 1,000.00 from brokerage's trust account
Further $24,000.00 to be paid forthwith.
Seller- Additional Damages
Provable damages;
Exceed the deposit;
Does the Deposit get credited to the Buyer on Account of Damages?
The Court answered: Yes.
Howe v. Smith (1884) U.K.
Tang v. Zhang, 2013, BCCA
Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA
Benedetto v. 2453912 Ontario Inc., 2019, ONCA
Actual Damages sustained:
- Real Estate Commission;
- Legal expense on the sale;
- Mortgage prepayment expenses on the sale;
- Moving expense;
- Loss of deposit on the purchase;
- Possible real estate commission on the purchase;
- Mortgage arranging fee on purchase;
- Temporary accommodation expenses;
- Carrying charges, utilities, taxes, mortgage payments on sale until disposition of this property;
- Liability for carrying charges, utilities, taxes, and mortgage payments on new property until it can be re-sold by the owner;
- Moving expenses associated with second move;
- Interim storage expenses;
- Other expenses attributable to the failure of the sale and the subsequent purchase.
Anticipatory Breach:
Let the Seller know, as soon as you know you cannot close.
Document the "communication" and immediately refer the matter to Seller's lawyer who will:
- Confirm breach with Buyer's lawyer;
- Initiate mitigation of loss steps.
- Provide instructions to relist the property.
Tang and Zhang (2013 BCCA)
"A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains.
Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contracts and is not dependant on proof of damages by the other party.
If the contract is performed, the deposit is applied to the purchase price."
Madame Justice Newbury
Purchase price was $2,030,000.00, Deposit was $100,000.00, just shy of 5%, was not a penalty and was forfeited in this case.
Loblaw's Case: (2005)
1473587 Ontario Inc. v. Jackson
Unpaid Deposit. Vendor can terminate.
"IN my view, the law applicable to this case is clear, as it ought to be.
When Loblaw, albeit through inadvertence, failed to pay the deposit cheque within the time specified, it breached a term which the parties had agreed was essential to the contract.
That made it a fundamental breach entitling the Vendors to treat the contract as discharged and releasing them from their obligation under it.
The Vendors were under no obligation to assert their right to treat the contract as ended any earlier than they did."
Redstone (7% deposit forfeited)
Test as in Varajao (case):
- Whether the forfeited deposit was out of all proportion to the damages suffered, and
- Whether it would be unconscionable for the seller to retain the deposit.
Is the forfeiture unconscionable? Consider the following:
- inequality of bargaining power;
- a substantially unfair bargain;
- the relative sophistication of the parties; (Builder v. individual buyer)
- the existence of bona fide negotiations;
- the nature of the relationship between the parties;
- the gravity of the breach; and
- the conduct of the parties.
"Justice Newbury cited one case in which a deposit at 20% was found to be reasonable, but added, at para. 27, the amount of the deposit must not be excessive. "
When shall deposit be placed into the Trust Account of the Brokerage?
Within 5 business days upon receipt (Act?)
Definition of Business Day? Interpretation Act repealed July 25, 2007, leaving a business day only excluding any Saturdays.
Suggestion: Use Calendar Days, to be accurate.
Qs:
Clause in Schedule to Offer, Direction to Release deposit to Seller if the deal did not close due to the Buyer's default.
Answer: Appropriate drafting issue. The default is not a clear cut. Mutual allegations against each other.
Suggested wording: Buyer's failure to deliver funds (on time), Proper Tendering by Seller, etc. Ask Buyer to initial the clause.
Comments: People are getting picky nowadays.
The departure of transactions from Bay Street, cost-prohibitive.
