Many things may go wrong and lead to the cancellation of a real estate purchase. As a result, real estate transactions are a pretty frequent subject of Small Claims Court litigation. It is especially so in a hot real estate market like Toronto. In cancelled real estate transactions, the most salient issue is usually the deposit. The question is whether the buyer should refund it. If you’re in a situation where the real estate transaction did not close, here are the basics about real estate deposits.
What is a real estate deposit?
- A deposit in a real estate deal is a certain amount of money that the prospective buyer gives the future seller, together with the accepted offer to buy.
- The purpose of the deposit is to demonstrate the buyer’s intent to purchase the property. In most cases, the seller’s real estate broker or lawyer keeps the money in a special trust account.
- If the purchase goes well, the lawyer credits the deposit toward the purchase price 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, the buyer cannot close because he or she cannot obtain the required mortgage. The buyer may change his or her mind. In such cases, the deposit remains with the seller even if the seller does not lose money due to the cancellation.
- In practical terms, this means the sale does not go through due to the buyer. It means that the seller does not have to prove that the purchase cancellation caused her financial losses. She keeps the deposit.
In what cases must the real estate deposit be returned?
There are three common reasons why the buyer might have reasonable legal grounds to claim the return of the real estate deposit:
- The buyer can claim a refund of the deposit if the real estate purchase didn’t close because of the seller’s fault. This might happen, for example, when the seller decides not to sell at the last minute. Or, perhaps, the seller didn’t disclose important facts about the property. The facts that she should have disclosed. The facts must be essential to the buyer’s purchase decision. The buyer had to back out once he or she finally learned about them.
- The purchase and sale agreement stipulates that the “deposit” isn’t a deposit at all but a partial payment for the property. If that’s the case, the buyer may claim the return of the deposit. However, the seller may try claiming financial or similar losses due to the buyer’s failure to close the transaction.
- The buyer may recover the deposit if the purchase and sale agreement clearly states that the seller must return it if the transaction fails to close. However, the seller may try to retain the deposit by claiming they suffered losses because the buyer was unable to close.
Real Estate Deposit in Small Claims Court
In most ordinary real estate transactions, the deposit amount does not exceed $50,000.00. It 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 over a real estate deposit, please get in touch with us for a free assessment of your case.
