Real Estate Litigation – Broken Deals, Deposit Forfeitures and Availability of Recourse


Under a matter involving an Agreement of Purchase and Sale (“APS”) dispute, retaining a real estate litigation lawyer is highly recommended, since frequently sale/purchase disputes relate to the question of whether or not the buyer can get his/her deposit back. litigation lawyer with a particular focus on real estate litigation is in the best position to explain viable options to a buyer and/or seller in such a dispute.

There are a few common circumstances under which an Agreement of Purchase and Sale cannot be completed. Most frequently, this includes the buyer’s inability to secure funds in time, however it can also be due to a failure to close, refusal by the seller to sell (or the buyer to buy), or an unexpected refusal to close by either of the parties involved. Every single scenario deals with a security deposit dispute, as the following examples demonstrate:

The Security Deposit Debate

Scenario One: I have signed an Agreement of Purchase and Sale to purchase a property. I no longer want to buy because I believe I over-bid on the purchase priceCan I get my security deposit back?

When an agreement of purchase and sale is signed, it requires a good-faith money deposit which is part of the purchase price of the property. This is security to the seller and ensures commitment from the buyer. If you have provided this, it is held in trust by the seller’s real estate agent, and can only be returned when all parties come to an agreement and sign a mutual release form.

A buyer needs good reason to back out of a purchase at the last moment. It is highly unlikely that a seller will be prepared to sign a mutual release if your reasoning is that you made a bad call on a property price. At the same time, your persistence on the matter can lead to further real estate litigation whereby a seller may desire additional damages they sustained as a result of the breach of agreement ( for example storage fees, taxes, mortgage interest etc.).

Thus in this scenario, the seller is entitled to hold on to the deposit through the realtor, and relist his/her property.

Scenario Two: I have signed an Agreement of Purchase and Sale to purchase a property however I was unable to secure proper financing for the purchase. Can I get my security deposit back?

 This depends on how your purchase and sale contract is worded (which reiterates the main reason for retaining a real estate litigation lawyer!)

Does your contract state that the agreement is “Subject to financing”? Is there a time limitation stipulated on the agreement for receipt of the deposit (for example, “the deposit is due on X day, after or upon which, agreement is subject to removal”). Precise wording is normally the difference between a collapsed deal, and one which involves a deposit to be lost. If your realtor has provided enough effective clauses in the purchase and sale agreement, then your bargaining power increases when/if the dispute is heard amongst parties.

As a common rule a litigation lawyer will tell you that the deposit is generally forfeited if the buyer does not proceed, unless the bargain states otherwise. The agreement must specifically state a return of a deposit (March Bothers & Wells v Banton), otherwise the only protection afforded to the buyer is that no interest can be earned on the deposit. (And no, if the seller relists and sells the property at an even higher price, this does not count as ‘interest’ on a deposit – See Tang v Zhang 2013 BCCA 52).

For these reasons, an experienced real estate litigation lawyer will assist you better in understanding your position as either a buyer or seller in such a scenario. If your purchase was not conditional on financing or you have waived that condition at some point, and you failed to get proper financing for the deal, then it is recommended to contact a lawyer and your agent.

Scenario Three: The Seller has backed out and refuses to sell the property. Can I get my deposit back?

If the seller has no intention of completing the agreement of purchase and sale, then the buyer is entitled to sue for damages, and the burden of proof is on the claimant (buyer) to show suffered damages. The unfortunate aspect is that the seller pays no deposit so the awarded damages are unpredictable, however a good real estate litigator will know how to provide for the best monetary outcome.

Generally the deposit is returned back to the buyer if the seller refuses to sell, unless the Agreement of Purchase and Sale states otherwise. For instance, if you and the seller have included in the agreement, a term allowing the sale to be contingent on the seller finding another house to buy, after the seller performs the good-faith efforts, you may not have a legal basis upon which you can complain.

However in the event of a clear breach by the seller, you are entitled to terminate the contract and recover your deposit and payments.

What should I do to prepare against losing a security deposit?

Let me be clear: caveat emptor (“buyer beware”) is an imperative principle in today’s real estate market. Always check the agreement, and get a real estate lawyer to review it before signing.

Additionally, if your situation has already escalated to seeking a mutual release, contact an experienced real estate litigation lawyer that can help you.