If a buyer defaults before a deposit is fully paid, can the seller terminate the Contract of Purchase and Sale and successfully sue for the unpaid deposit money? It depends on the contract.
In Agosti v. Winter 1, a standard form Contract of Purchase and Sale 2 required a $10,000 deposit, “upon subject removal.” No other deposit requirements were added to the standard wording. The purchase price was $280,000. In Clause 2, the standard wording required all deposits to be paid to the brokerage in trust in accordance with the Real Estate Services Act.
The standard contract made time of the essence. It also provided that if the buyer failed to pay the balance due, the seller could terminate the contract, in which case:
12. … [t]he amount paid by the Buyer will be absolutely forfeited to the Seller … on account of damages, without prejudice to the Seller's other remedies.
Upon subject removal, the buyer failed to pay the $10,000 deposit and then told the sellers that she would not proceed with the purchase. The sellers terminated the contract and sold the property to another purchaser for $275,000, being $5,000 less than the first deal. The sellers then sued the buyer for the unpaid deposit and general damages. In a summary trial, the sellers sought judgment for the unpaid deposit.
The buyer claimed that since the sellers terminated the contract, they could not now rely on it to collect the unpaid deposit. According to the buyer, the sellers could only claim general damages, which in this case were $5,000, being the seller’s loss on the re-sale of the property.
When one party breaches a fundamental term of the contract, the innocent party may treat the breach as repudiation, terminate the contract and sue for damages. Both parties are then discharged from further performance of the contract. The innocent party, however, retains any rights acquired up to that time. If, at the time of repudiation, the seller has acquired the unconditional right to a deposit that remains unpaid, the seller may collect it.
In Agosti, the British Columbia Court of Appeal dismissed the seller’s claim for the unpaid $10,000 deposit. Unless otherwise altered, the standard contract does not give a seller an unconditional right to the deposit when repudiation occurs. The standard contract does not say a seller is absolutely entitled to the deposit if the sale does not complete.
In the court’s view, if the sale does not complete, the standard contract does not make the deposit non-refundable or forfeit it automatically to the seller. Instead, the standard wording permits a seller to claim the deposit on account of its damages. The court said that, “If the damages are less than the deposit, the Seller is not entitled to the excess, but it is returned to the Buyer.” 3
In Agosti, the sellers were entitled to payment of the deposit when the subjects were removed. The standard contract said the deposit would be held by the brokerage or paid into court, pending resolution of the sellers' claim. The amount forfeited to the sellers would be "the amount paid by the Buyer ... on account of damages." Assuming the sellers proved their $5,000 in damages, that is the amount of the deposit that would be forfeited to them.
Given the standard contract, if upon a buyer’s default, a seller wants the ability to terminate the deal and recover any unpaid deposit, the better practice is to give the seller an absolute right to the unpaid deposit by adding words making the deposit non-refundable. 4
Agosti v. Winter, 2009 BCCA 490 aff’’g 2008 BCSC 1308.
British Columbia Real Estate Association, “Contract of Purchase and Sale” (January 2005).
|3.||Agosti v. Winter, 2009 BCCA 490 at para. 21.|
|4.||Vanvic Enterprises Ltd. v. Mack, (1985) 66 B.C.L.R. 211 (BCCA).|
|Back issues of Legally Speaking are available to REALTORS® on BCREA's REALTOR Link® homepage. Subscribers who are not REALTORS®, and who wish to see back issues, should contact BCREA by email at firstname.lastname@example.org, or by phone at 604.742.2784.|
|Legally Speaking is published eight times a year by email and quarterly in print by the British Columbia Real Estate Association, and funded in part by The Real Estate Foundation of British Columbia. Real estate boards, real estate associations and REALTORS® may reprint this content, provided that credit is given to BCREA by including the following statement: "Copyright British Columbia Real Estate Association. Reprinted with permission." BCREA makes no guarantees as to the accuracy or completeness of this information.|
Copyright © British Columbia Real Estate Association
Collapsed Sale — Remarketing and Reasonable Mitigation
The falling market of 2008 saw a number of buyers refusing or unable to complete their purchases and sellers were often electing to terminate their contracts, relist and sell their property. Sellers then often sued the defaulting buyer for damages, being the difference between the original sales price and the ultimate sale price and related costs.
In relisting their property, sellers are complying with their obligation to mitigate their damages. Care must be taken when relisting or reselling properties in such circumstances however, as demonstrated in a recent BC case. 1
As the closing date of November 13, 2008 approached, the buyer who had agreed to purchase the home for $845,000 was not in a position to close; she had not sold her home and asked for an extension. The seller, who needed the sale proceeds to close on her new purchase, refused to grant an extension. The seller relisted the property on November 14, 2008 for $849,000.
The original buyer submitted a new offer at the original price but with a later closing date which was not accepted. The seller accepted a new offer from a different buyer on December 1, 2008 with a completion date of December 3, 2008 and a purchase price of $670,000, resulting in a net loss of $169,356.25 to the seller. The seller then sued the original buyer to recover her damages, only a portion of which would be satisfied by the original deposit of $30,000.
The defaulting buyer said that the seller did not act reasonably in mitigating her damages and acted prematurely and unreasonably when she sold the property to the second buyer at a bargain.
In accordance with the established case law, the courts held that the burden lay with the seller to prove her damages and that her mitigation was reasonable. The Court agreed with the original buyer and found that the seller did not act reasonably in accepting the new offer. The Court believed the seller acted precipitously in selling the property at a price significantly below the fair market value of $845,000 as established in an appraisal dated November 21, 2008. The Court acknowledged that the seller needed the funds to close on her purchase, but found she did not pursue the other options available to her such as interim bridge financing or negotiating further with the original buyer.
While the seller's real estate agent said the sale price under the second contract was reasonable for the market at that time, the seller provided no appraisal evidence supporting that position. Indeed, the only appraisal evidence submitted to the Court was the November 21 appraisal, indicating a fair market value of $845,000.
The Court felt the seller could have renegotiated her deal with the first buyer which would have been a more reasonable solution. The Court held that her failure to act reasonably meant the buyer was not required to pay for her avoidable losses and her claim was dismissed by the Court.
All REALTORS® and their clients should take note of this case when marketing properties in such circumstances. The seller must act reasonably when mitigating losses and should seek legal advice as they develop a marketing strategy and consider any new offers for their property.
A rushed sale, which may seem reasonable in light of circumstances, may prevent a successful damages claim later. If an offer dramatically lower than the original price is accepted, a formal independent appraisal supporting that lower price as being reasonable may be necessary to support the damage claim in any subsequent court action.
Edward L. Wilson
Lawson Lundell LLP
Hargreaves v. Brar, 2010 BCSC 538.
Back issues of Legally Speaking are available to REALTORS® on BCREA's REALTOR Link® homepage. Subscribers who are not REALTORS®, and who wish to see back issues, should contact BCREA by email at email@example.com, or by phone at 604.742.2784. Legally Speaking is published eight times a year by email and quarterly in print by the British Columbia Real Estate Association, and funded in part by The Real Estate Foundation of British Columbia. Real estate boards, real estate associations and REALTORS® may reprint this content, provided that credit is given to BCREA by including the following statement: "Copyright British Columbia Real Estate Association. Reprinted with permission." BCREA makes no guarantees as to the accuracy or completeness of this information.
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