September, 2012

A seller ("S") enters into an agreement with a purchaser ("P") will sell to P, S's residential real estate (the "Property").  The sale and purchase agreement (the "Agreement") requires P to pay S a total of $100,000.00 for the Property, with P having to pay "upfront" a deposit of $5,000.00 (the "Deposit").  Before closing, P reneges and the transaction is aborted.  S takes the Deposit and subsequently resells the Property.

Two likely scenarios may occur here:

(i)            in reselling the Property, S sells for an amount less than the price stipulated in the (original) Agreement, say, for only $90,000.00 (the "Loss Scenario"); or

(ii)           in reselling the Property, S is able to obtain a sale price in excess of that stipulated in that (original) Agreement, say, $110,000.00 (the "Windfall Scenario").

What are S's rights (and obligations) in relation to the Deposit?  Both the Manitoba Court of Appeal 25 years ago and the British Columbia Supreme Court in a recent case (judgment issued February 9, 2012, hereinafter, the "Tang Case") have held that the parties' rights (and obligations) with respect to a deposit in this situation depends on the precise wording of the sale and purchase agreement.

The situation dealt with in the Tang Case is an example of the Windfall Scenario.  In that case, the Court compared the wording of the contract in the Tang Case with the wording in the contracts considered in two earlier B.C. cases and noted that:

(i)            in the Williamson Pacific Developments case, the deposit was stated to be "non-refundable", and the use of that word, together with the deposit forfeiture language in the contract, convinced the Court to hold that the deposit was forfeited to the aggrieved seller without the proof of actual damages; and

(ii)           in the Agosti case, the word "non-refundable" was not present, and the relevant language specified that where the buyer reneged, the deposit was "absolutely forfeited to the seller…on account of damages".  The Court concluded that this language meant that in order to actually claim the deposit monies, the seller would have to prove damages.  As the Agosti case was an example of the Loss Scenario, the aggrieved seller was entitled to damages, but the point here was that such entitlement only flowed from the fact that the seller did suffer a loss (in reselling the property).

The wording in the contract considered by the Manitoba Court of Appeal was also significant in that the Court held that when the buyer reneged and the seller took the buyer's deposit, that act also terminated the contract and all rights of the seller arising out of the buyer's default.  Consequently, when the seller resold the property at a loss (an example of the Loss Scenario), the aggrieved seller was not able claim against the buyer for the deficiency.  As a result, the wording in the standard Manitoba form of residential property offer to purchase mandated for use by realtors was changed so that an aggrieved seller would be able to claim the deposit while still maintaining the seller's right to claim further compensation from the buyer where the seller subsequently sold the property at a loss.

The aforementioned Manitoba standard form contract wording dealing with what happens to a deposit is as follows:

"Where the defaulting party is the Buyer, the Seller shall be entitled to retain the deposit as the Seller's own property, but whether or not the Seller has then terminated or thereafter terminates the Seller's right and obligation to sell and the Buyer's right and obligation to purchase under this agreement by virtue of the Buyer's default, such retainer of the deposit shall not itself constitute a termination of this agreement and shall not restrict the Seller from exercising any other remedies which the Seller may have by virtue of the Buyer's default, including the right to claim damages from the Buyer which the Seller sustains in excess of the deposit".

The question the writer poses in this paper is whether or not the above Manitoba language is sufficient to enable an aggrieved seller to keep a defaulting buyer's deposit without the need for the seller to suffer, and then if necessary, prove to a Court that the seller has suffered a loss?  The writer's belief is that the wording is sufficient for this purpose.  The word "non-refundable" does not appear in the wording, but it is clearly stated that the aggrieved seller "shall be entitled to retain the deposit as the Seller's own property".  This language - in the writer's view - is equivalent to the use of the word "non-refundable".  If the deposit is kept by the aggrieved seller and becomes the seller's "own property", then by the very nature of things, the deposit can't be "refundable".

The Tang Case also deals with an attempt by the buyer to have the sale agreement invalidated on the basis that the seller failed to provide the buyer with a title search.  Not surprisingly, the Court took the position that notwithstanding that the seller had promised to provide a title search to the buyer, the failure of the seller to do so was not "a condition precedent entitling (the buyer) to terminate the contract".  In so holding, the Court noted that the promise to provide a title search was not indicated to be a promise for "the sole benefit" of the buyer.  In the aforementioned Manitoba form of standardized offer to purchase residential real estate, there is a differentiation between conditions which "benefit the buyer" and conditions which "benefit the seller".  All of the conditions stated to "benefit the buyer" are prefaced with the words: "This agreement is terminated unless the following conditions for the benefit of the buyer are fulfilled or waived".  What would happen in Manitoba, if a buyer was able to have included under the heading "CONDITIONS BENEFITTING THE BUYER" a promise by the seller to produce a title search?  It is this writer's opinion that it would be inequitable to allow a buyer to terminate simply because no title search was produced, but that view would run contrary to the plain meaning of the language if such a condition was included in the place suggested.  Perhaps consideration should be given to amending the standard form offer so as to differentiate between conditions which benefit the seller, the non-fulfillment of which, would entitle the buyer to terminate, and other conditions which would not permit the buyer to terminate on non-fulfillment, but would be more in the nature of warranties.

The Tang Case does not deal with the question of whether not an aggrieved seller, who would otherwise be entitled to keep the defaulting buyer's deposit, would be prohibited in law from doing so by virtue of the fact that a Court adjudicating the matter concluded that the amount of the deposit, in relation to the total sale and purchase price, was excessive.  That is, where the Court holds that forfeiture of the deposit constitutes the seller obtaining an unfair or inequitable penalty imposed on the buyer.  The creation of an unfair penalty must be kept in mind by those persons who prepare agreements providing for the disposition and acquisition of interests in real estate.