Forfeit Of Deposits In A Collapsed Real Estate Transaction

The buyer in a real estate transaction pays a deposit at the time when an offer is presented or when the offer is accepted by the seller. This deposit is usually held in the trust account of the listing brokerage or the seller’s lawyer. What is the purpose of this deposit?

The giving and receiving of the deposit confirms the contractual obligation between the parties and is a consideration towards the purchase price. The deposit is adjusted as a credit to the buyer if the transaction is successfully completed. But what happens when the transaction is not completed. The buyer is in default and is in breach of the contract.  The seller is willing, able and ready to close the transaction. The deal has collapsed and the buyer is not in position to close the deal. The buyer now wants his deposit back. What is the treatment of the deposit in a situation like this? Is this deposit immediately released to the buyer or the seller has a right to forfeit the deposit? Ontario’s standard real estate form is silent on it.

What are the remedies for the seller?

In practice the seller has few options if the buyer defaults:

  1. The seller will forfeit the deposit and put the property back in the market for sale. The buyer will have to sign a release form to release the deposit to the seller. This form is usually provided by the real estate brokerage if the deposit is with them. Sometimes it is negotiable between the parties and a portion of the deposit is released to the seller and the balance to the buyer.


  1. Apart from the deposit, the buyer is also responsible for all of the seller’s losses. If property is back into the market and the seller does not get the same price and sells for less, the buyer is responsible not only for  the  difference in the price but also for all the other costs incurred by the seller in the sale of the property. He could file a court case for damages against the buyer.


  1. The law also provides that the seller could sue the buyer for specific performance of the contract. But litigations are expensive and the seller should be able to financially sustain it.

As the seller has a right to take the deposit, most prudent sellers would go with option 1 and move on.

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January 19 2017.