Buyer Beware: You May Lose Your Deposit

April 25th, 2015 by Florendo Llameg

For most individuals, buying a home could be one of the largest investments they could make in their lifetime. Undoubtedly, a home purchase should be taken seriously and given much thought. Rushing into a home purchase and then deciding afterwards that you no longer want to buy it can have serious financial consequences. Such a complete turnaround has been the subject of many lawsuits and court decisions, and one of which is discussed below.

In Pleasant Developments Inc. v Iyer and Ramachandran, (2006 CanLII 10223 (ON SCDC), the purchasers of a new residential home signed an Agreement of Purchase and Sale (“APS”) on September 15, 2003 for $280,000.0 with a closing date of January 23, 2004.  Upon signing the APS, the purchasers put down a deposit of $10,000.00.

Two days after the purchasers signed the APS, they decided not to pursue the purchase deal by seeking to verbally cancel the APS.  Shortly thereafter, the purchasers’ lawyer sent a letter to the vendor stating that the APS was at an end and that the deposit should be returned to the purchasers.  The vendor refused to give it back and the purchasers sued the vendor in court.

When the case was first heard before the Small Claims Court, said court  found that the purchasers are entitled to the return of almost the entire deposit, save for $700.00 which the vendor should keep as compensation for damages suffered.

On appeal by the vendor to the Divisional Court, however, the court in the Pleasant case reversed the Small Claims Court by ruling that the entire deposit should be forfeited in favor of the vendor and that it was not necessary for the vendor to suffer any damages in order to keep the deposit.  The Divisional Court enunciated the following legal doctrines:

  1. A deposit may be forfeited without proof of damages suffered by the vendor. This is true even assuming that the vendor is able to resell the property at a purchase price, which is more than enough to compensate for any loss incurred from the first sale;
  2. The use of the word “deposit” in the contract implies that its payment is intended for forfeiture upon the purchaser’s breach; and
  3. If the agreement is silent for its return and the purchaser defaults, the deposit is by its very nature is forfeited in favor of the vendor.

In Pleasant, the Divisional Court found that there is nothing in the APS suggesting that the deposit should be returned upon the purchasers’ default and since the purchasers breached the contract by withdrawing from the deal,  the vendor has the legal right to retain same without having to prove damages.  A couple of lessons can be learned from Pleasant.  Firstly, after signing an APS and paying a deposit, in the event that the purchaser backs out of the deal,  the purchaser may stand to lose the deposit.  Secondly, and perhaps more importantly, the purchaser may lose the deposit even though the vendor selling the house may not suffer any damages.

In conclusion, buying a home should not be taken lightly. While decided in 2006, the Pleasant case is still good law as the same has not been overturned yet.  Pleasant is a strong reminder that before signing an APS and putting down a deposit, you should do your research and make sure that the home you are signing for is the one that you want. Otherwise, if you end up changing your mind, you may never get your deposit back.

Florendo P. Llameg is an Associate at Devry Smith Frank LLP. His practice includes Corporate/Commercial, Real Estate and Immigration Law. He can be reached at 416-446-5828 or florendo.llameg@devrylaw.ca.

Disclaimer: This article provides general information only and should not be relied upon and/or construed as a legal advice. Considering that you may have specific needs and requirements, you should consult the appropriate and qualified professional to advise you in the context of your particular circumstances.


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