Taking a real estate deposit dispute to Small Claims Court

There are many things which may go wrong and lead to a cancellation of a real estate purchase. As a result, and especially in a hot real estate market as in Toronto, real estate transactions are quite a frequent subject of Small Claims Court litigation. With cancelled real estate transactions, the most salient question is usually the matter of the deposit, and whether it should be refunded. If you’re in a situation where the real estate transaction did not close, here are the basics you need to know about real estate deposits.

What is a real estate deposit?

A deposit in a house or condo purchase transaction is a certain amount of money which the prospective buyer gives the future seller on the day when the offer to buy is made or soon after that. The purpose of the deposit is to show the good intention of the buyer to buy the property. In most cases the money is kept by the seller’s real estate broker or lawyer on a special trust account. If the purchase goes well, the deposit is credited toward the purchase price of the house or apartment and required fees or taxes.

What happens to the real estate deposit if the purchase does not close?

Briefly, that depends on whose fault it is that the purchase didn’t happen. For example, in many failed transactions, it’s the buyer who is unable to close because he or she cannot not obtain the required mortgage or simply changes his or her mind. In such cases, the deposit stays with the seller even if the seller does not lose money because of the cancellation. In practical terms, this means that if the sale does not go through because of the buyer, the seller does not have to prove that the purchase cancellation caused her financial losses – she simply keeps the deposit.

In what cases must the real estate deposit be returned?

There are three common reasons why the buyer might have good legal grounds to claim the return of the real estate deposit.

The first is simply the converse of what we discussed earlier, that is, the buyer is usually entitled to a refund of the deposit if the real estate purchase didn’t close because of the fault of the seller. This might happen when, for example, the seller might just decide not to sell at the last minute. Or, perhaps, the seller didn’t disclose important facts about the property which she should have disclosed because they were essential to the buyer’s purchase decision, and the buyer had to back out once he or she finally learned about them.

The second reason is if the agreement of the purchase and sale of the property is structured in such a way, and the circumstances are such that the “deposit” isn’t actually a deposit, but just a partial payment toward the purchase price of the house or condo. If that’s the case, the buyer may claim the return of the deposit, although the seller may, of course, put forward a counterclaim for financial or similar losses which she experienced due to the buyer’s failure to close the transaction.

Finally, the buyer may be entitled to claim back the deposit if the agreement of purchase and sale is clear that the deposit should be returned if the transaction fails to close. Again, however, the seller may try to nonetheless keep the deposit by claiming that he or she suffered losses because of the buyer’s failure to close, and should be compensated by the amount of the deposit.

In most ordinary real estate transactions, the amount of deposit does not exceed $25,000.00, which makes Small Claims Court the most appropriate forum for real estate deposit disputes. A paralegal can represent you in Small Claims Court: if you find yourself in a dispute about a real estate deposit, please contact us for a free assessment of your case.

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