December 15th - 2003

Who gets deposit when the deal goes south?

As most of us have learned, some more painfully than others, it's generally easier to dispose of money than to acquire it. But that's not always the case and one exception involves the return of deposits in the case of a failed agreement of purchase and sale.

As most of us have learned, some more painfully than others, it's generally easier to dispose of money than to acquire it. But that's not always the case and one exception involves the return of deposits in the case of a failed agreement of purchase and sale.

Accepting the deposit is relatively straightforward. It may come with the offer ("herewith" in OREA's Universal Agreement of Purchase and Sale - Form 100) or it may come when the offer is accepted ("upon acceptance"). Additional deposits may also be due on the removal of conditions or under other defined circumstances.

Section 23(3) of Regulation 986 of the Real Estate and Business Brokers Act stipulates that within two banking days, monies held in deposit must be deposited in the statutory trust account of the broker named in the agreement.

However, if the deal goes south and the transaction is terminated, the disbursement of the deposits is a lot more complex. Some buyers, or REALTORS for that matter, may be misled by language of conditional clauses in the agreement that states that "if the transaction is not completed (or if the condition is not fulfilled) the deposit shall be returned to the purchaser."

In reality, in the case of a failed transaction, the money should only be paid out in two instances: in accordance with a release or direction (using OREA's Mutual Release - Form #122) signed by all parties, or as directed by a court order.

That's because there may be unresolved legal aspects to the reasons for the failure of the transaction. The buyer may not have used reasonable efforts to satisfy a condition, or the seller to comply with a provision, of the contract. These are legal matters that can only be determined with legal advice or, in the extreme, a court ruling.

Brokers, as trustees of deposit monies, have no authority to make unilateral decisions under these circumstances. They could end up personally liable for the amount involved if they pay it to the wrong party as well as criminally liable for breach of trust contrary to the provisions of REBBA. At the first sign of a dispute between the buyer and seller, REALTORS should contact legal counsel to facilitate negotiations with the lawyers for the contracting parties to obtain a mutual release or to arrange for the monies to be paid into court if the buyer and seller become involved in a court action.

For more information, download the legal pamphlet "DEPOSITS AND THE TERMINATED TRANSACTION" from the legal menu in the "My OREA" section of the OREA web site, www.orea.com and/or the Registrar's Bulletin "FAILED AGREEMENTS OF PURCHASE AND SALE - RETURN OF DEPOSITS" from the RECO site (Salespersons & Brokers / Registrar's Bulletins) at www.reco.on.ca. REALTORS can also contact OREA or their local real estate board for details of OREA continuing education courses on this or related subjects.

In summary -

In the case of a failed transaction, a broker should only disburse the deposit:

  • In accordance with a release signed by all parties to the agreement (OREA Mutual Release - Form #122).

OR

  • As directed by court order

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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