December 8th - 2016

Legal Beat – Size of deposit may affect forfeiture

In this commercial case, the buyers did not fulfill their side of the contract. The judge weighed in on whether the proposed penalty fit the damages suffered by the seller.

Legal Beat

In this commercial case, the buyers did not fulfill their side of the contract. The judge weighed in on whether the proposed penalty fit the damages suffered by the seller.

by Merv Burgard

Legal BeatThe parties signed an agreement of purchase and sale (APS) for a large warehouse in Brantford, Ontario. The buyer intended to use the facility to operate a government-licensed medical marijuana grow-op. That required a licence from Health Canada.

The purchase price was $10.2 million, with an initial deposit of $100,000 and a further deposit of $200,000 after the conditions were waived or fulfilled.

The buyer had problems obtaining the licence and financing. An extension of the closing date was arranged with an additional deposit of $450,000, to be held in trust by the commercial REALTOR®.

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The deal failed to close. The buyer argued that there were breaches in the agreement by the seller. However, the judge did not agree, ruling that the buyer did not fulfill its side of the contract and acted contrary to good faith obligations.

The next discussion was whether the proposed forfeited sum of $750,000 that the buyer would have to pay was out of proportion to any damages suffered by the seller when there was no evidence of such damages. Another point of dispute was whether it was unconscionable for the seller to retain the deposit. The court examined the concept of relief against forfeiture – an equitable remedy available to prevent a party from exercising legal rights that arise as a result of mistake, accident or surprise, or where the exercise of the rights is otherwise unconscionable in all the circumstances. Relief from forfeiture refers to the concept of someone losing (forfeiting) something, and judges have the authority to reduce that loss or effect.

In the end, the judge granted relief against forfeiture to the buyer and decided that the sum payable by the buyer to the seller should be reduced from $750,000 to $350,000, with the balance and any accrued interest to be paid to the buyer by the commercial REALTOR® from its trust account.

Redstone v Simple Technologies and CBRE 2016 ONSC 4388 (CanLII) MERV’S COMMENTS

Judges must look at the size of any deposit in relation to the particular transaction and its proportionality to any forfeiture. Perhaps 10 to 20 per cent would be considered acceptable. The situation might change if the deposits are stated in the APS to be “non-refundable and not subject to relief from forfeiture”.

The seller was awarded $350,000. I wonder if the commercial REALTOR® had an OREA Commercial Listing Form, which describes a possible commission of half of that amount.

See this paragraph in clause 2 of Form 520: “In the event the buyer fails to complete the purchase and the deposit or any part thereof becomes forfeited, awarded, directed or released to the seller, the seller then authorizes the listing brokerage to retain as commission for services rendered, fifty (50 per cent) per cent of the amount of the said deposit forfeited, awarded, directed or released to the seller (but not to exceed the commission payable had a sale been consummated) and to pay the balance of the deposit to the seller.”Mervin Burgard Q.C.

Merv Burgard, Q.C.
December Edge

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