Statement of Law on Deposits in Real Estate: Tang v. Zhang, 2013 BCCA 52

Is a Deposit Refundable?

The British Columbia Court of Appeal recent released its decision in Tang v. Zhang, 2013 BCCA 52, and expressly overturned the 2009 case of Agosti v. Winter. In Agosti, there had been a dichotomy of contractual language that either renders something a “true deposit” (which would be forfeitable regardless of any actual damage) vs. a pre-payment only deposit (only forfeitable if actual damages are suffered and proven).  The exact language used in the contract would then be scrutinized to determine the intent of the parties.  Accordingly, if a vendor wanted the deposit to be automatically forfeited, it was very important to use very precise language and to avoid the suggestion that the deposit was anything other than absolutely forfeit.

In the recently released case of Tang v. Zhang, the Court restated the law on real estate deposits as follows:

1.       On a general level, the question of whether a deposit or other payment made to a seller in advance of the completion of a purchase is forfeited to the seller upon the buyer’s repudiation of the contract, is a matter of contractual intention;

2.       Where the parties use the word “deposit” to describe such a payment, that word should in the absence of a contrary provision be given its normal meaning in law;

3.       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 contract, 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;

4.       The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages.  However, where the deposit is of such an amount that the seller’s retention of it would be penal or unconscionable, the court may relieve against forfeiture, as codified by the Law and Equity Act;

5.       A contractual term that a deposit will be forfeited “on account of damages” on the buyer’s failure to complete does not alter the nature of a deposit, but may be construed to mean that if damages are proven, the deposit will be applied against (“on account of”) them.  If no damages are shown, the deposit is nevertheless FORFEITABLE, subject always to the expression of a contrary intention.

Many thanks to Andrew Prior for his comments on this Article.

Written by Peter Borszcz a Kelowna Real Estate Lawyer at PIHL LAW CORPORATION.

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Technical Bulletin for Realtors: Update to Standard Contract of Purchase and Sale

The Standard Contract of Purchase and Sale was recently updated to add the word “non-refundable” to Paragraph 12.

“12. TIME: Time will be of the essence hereof, and unless the balance of the cash payment is paid and such formal agreements to pay the balance as may be necessary is entered into on or before the Completion Date, the Seller may, at the Seller’s option, terminate this Contract, and, in such event, the amount paid by the Buyer will be non-refundable and absolutely forfeited to the Seller in accordance with the Real Estate Services Act, on account of damages, without prejudice to the Seller’s other remedies.”

This change is likely a response to the recent BC Supreme Court decision in Tang v. Zhang, 2012 BCSC 214, which was released in April 2012. In this case, the court was resolving two different lines of judicial authority.

  1. In the first line of decisions, citing Williamson Pacific Developments the language of the standard form contract creates a non-refundable deposit scheme that does not require proof of damages.
  2. In the second line of decisions, arising out the more recent 2009 BC Court of Appeal decisions in Agosti the standard form contract, without the non-refundable wording, does not create a non-refundable deposit scheme. In the Agosti line of cases, a Seller is required to prove damages in Court in order to recover that amount.

By adding the word NON-REFUNDABLE to the standard contact of purchase and sale, the law cited in Williamson Pacific applies and BUYERS who fail to complete or otherwise default on the terms of their contract are setting the MINIMUM damages that a defaulting buyer will be liable for.  Importantly this is a MINIMUM, a Buyer who defaults on a contract of purchase and sale may be liable for all the Seller’s damages, among other things, loss of profits, reselling and commission costs, and mortgage carrying costs.

Note the BC Supreme Court in Tang v. Zhang noted that “this issue seems destined for the Court of Appeal” so this is likely not the last word on this issue. Stay tuned…

Peter Borszcz is a Real Estate Lawyer and Business Lawyer at PIHL Law Corporation in Kelowna, British Columbia.

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Deposits on Residential Real Estate Contracts

A DEPOSIT is usually made from the BUYER in the BUYER’s AGENTS trust account and is held according to the stakeholder provisions of the Real Estate Services Act.

This means that the DEPOSIT can generally ONLY be released prior to completion where:
a) it is paid into COURT or in accordance with a COURT ORDER; or
b) by WRITTEN AGREEMENT of the parties.

Currently, there is a “gap” in RESA whereby a Buyer who does not remove his subject conditions could be faced by a stubborn Seller who refuses to release the deposit. This would force the Buyer (who doesn’t want the home anyway) to go to Court to get his deposit returned. In light of this I recommend that Buyer’s do not make a deposit is made until subject removal.

The BC Court of Appeal expanded our understanding of “Deposits” in the recent case of Agosti v. Winter 2009 BCCA 490. The court distinguished between true deposits (amounts up to 10% of the purchase price) and excessive deposits. Absent other evidence, EXCESSIVE DEPOSITS (over 10%) may be characterized as punitive by the court and subject to “review and relief” under the Law and Equity Act.

With TRUE DEPOSITS, the court upheld the general rule that a true deposit is “earnest money” and is forfeit in the event of the Buyer’s failure to complete. This upholds the “ordinary meaning” of the word deposit and is reinforced by words such as “non-refundable” and “absolutely forfeited” upon breach by the Buyer. According to the Court, a Seller would be able to claim the TRUE DEPOSIT, even if such amount did not amount to a genuine pre-estimate of damages.

Importantly, this decision did not LIMIT the liability of the non-completing BUYER to the deposit amount alone. If forced to litigate, most Sellers are likely to seek amounts over and above the deposit, including (but not limited to) loss of profit, re-marketing costs, upkeep costs, and interest costs.

How can Realtors advise their clients?
a) no deposit should be made until subjects are removed;
b) a maximum deposit of 10% to ensure the deposit is a TRUE DEPOSIT;
c) once made to the brokerage, inform client that the deposit can ONLY be returned according to RESA; and
d) the minimum claim of a Seller in breach is likely the deposit amount, however the maximum claim may be substantially higher.

Addenda:
The Professional Standards Manual says that Listing Agents should, if no deposit is received, “advise sellers of the merits of a deposit being received from buyers”. “Merits of a Deposit” is difficult language for Realtors and it will necessitate “what if” discussions in the event of non-completion. From a Realtor’s perspective this is a good time to discuss what lawyer your client wishes to use.