Failure to Close Purchase of Property

Generally, everyone has experiences either purchasing or selling a residential property at some point in their lifetime.

As a result, everyone experiences the various feelings on closing day of nervousness, anxiousness, and (hopefully) eventually happiness when they receive confirmation from their solicitor that the transaction has completed or “closed”. However, what happens if the purchaser does not complete their end of the deal and the seller does not receive funds on closing day? Imagine what the seller would feel, how they would act, especially if they have them-self(ves) entered into an agreement to purchase a home. What is the seller entitled to in these circumstances? Are they entitled legally to receive the deposit? What about their expenses?

Where a sale of land does not close due to default by the purchaser, the seller is entitled to the deposit without having to prove actual damages (De Palma v. The Runnymede Iron & Steel Company, 1949 CanLII 73 (ON CA), [1950] O.R. 1 (C.A.) at 8). Essentially, this means that the seller does not actually have to show the court that they suffered any loss whatsoever to be entitled to the deposit.

The purpose of the forfeiture of a deposit was described in H.W. Liebig & Co. Ltd. v. Leading Investments Ltd. (1986), 1986 CanLII 45 (SCC), 25 D.L.R. (4th) 161 (S.C.C.) at p. 182 as compensation “for the fact that his property was taken off the market for a time as well as for his loss of bargaining power resulting from the revelation of an amount that he would be prepared to accept”.

However, it is possible that the deposit may not be forfeited to the seller, if the court orders that the purchaser is entitled to relief from forfeiture.

Section 98 of the Courts of Justice Act provides simply that: “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.”

The test that the purchaser must satisfy is outlined in De Palma v. The Runnymede Iron & Steel Company, 1949 CanLII 73 (ON CA), [1950] O.R. 1-15, [1950] 1 D.L.R. 557 and more recently by the Court of Appeal in Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282 (CanLII) at para 10;

In order to obtain relief from forfeiture, the purchaser is required to establish:

1. That the proposed forfeited sum is out of proportion to the damages suffered by the claimant and
2. That it would be unconscionable for the vendor/ claimant to retain the deposit paid. See Varajao v. Azish, 2015 ONCA 218 (CanLII), at paragraph 11.

Another line of authority is adopted in by the Supreme Court of Canada in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC), [1994] 2 S.C.R. 490 at para. 33;

…the following are the appropriate questions to consider in determining whether there should be relief from forfeiture…first, was the conduct of the plaintiff reasonable in the circumstances; second, was the object of the right of forfeiture essentially to secure the payment of money, and third, was there a substantial disparity between the value of the property forfeited and the damage caused the vendor by the breach?

Therefore, the seller is not necessarily automatically entitled to the deposit if the court determines that the seller did not act reasonably in the circumstances, and/or whether the quantum of the deposit is so large in proportion to the damages suffered that it is “unconscionable” for the seller to retain.

In Tang v. Zhang, 2013 BCCA 52 (CanLII), 359 D.L.R. (4th) 104. At issue in the case was the forfeiture of a deposit of $100,000 on a residential real estate purchase of slightly more than $2 million. The trial judge relieved against forfeiture on the basis that the vendor had been able to re-sell the property for more than the original purchase price so that he had not suffered any loss. The court of appeal reversed the trial decision.

Yet the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case. (Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282 (CanLII) at para 25).

Also it is worth noting that both 10% and 20% deposits have been declared forfeit and not unconscionable by the Courts in the past (see Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282 (CanLII)).

Where there is no gross disproportionality in the size of the deposit, the court must consider other indicia of unconscionability.

The list of the indicia of unconscionability is never closed, especially since they are context-specific. But the cases suggest several useful factors such as inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties.

Nevertheless, if the transaction was a straightforward commercial or residential real estate transaction undertaken in the expectation of profit by both sides, who were previously strangers, with no inequality of bargaining power between them and/or no fiduciary relationship. Subject to any other relevant factors, in these cases the court will find that there was no unconscionability and declare the deposit forfeit (see Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282 (CanLII) paras 29-32).