One of the frequently asked questions I get asked in a real estate transaction is what happens to the Buyer’s deposit if a real estate transaction fails to close? Many times Seller(s) assume they automatically get to keep the Buyer’s deposit, in reality that is not the case.
In a typical real estate Agreement of Purchase and Sale unless otherwise specified, the Buyer’s deposit must be kept in the real estate “trust account” of the Brokerage who has the listing of the property being purchased. Once any conditions that may exist in the transaction have been fulfilled or otherwise removed such as mortgage financing, a home inspection or the sale of the buyer’s current home etc. and the deal becomes “firm,” that deposit is then applied to the purchase price of the property on completion/closing of the sale..
The issue arrives when a transaction for whatever reason(s) doesn’t close. Perhaps the Buyer(s) may be short the needed funds or other issues/circumstances arise that prevents them from wanting or unwilling to fulfil their obligations in the Agreement and the sale does not close. Naturally, the Buyer(s) wants their deposit returned. At the same time however, the Seller(s) is upset, they may have another purchase they are unable to complete as they needed the funds from the sale of their existing property to close the purchase of another. Understandable they want and feel they are entitled to keep the Buyer’s deposit. It’s not that easy.
There are two ways a real estate Brokerage can release a Buyer’s deposit. The most common and preferred method is to have both the Buyer(s) and Seller(s) sign a Mutual Release. This is a standard document used across the province of Ontario. This I know this as I sit on the committee at the Ontario Real Estate Association that designs and revises the over 200 forms we use across the province for real estate sales and rentals. The key wording in the Mutual Release is as follows:
We, the Buyer and the Seller in the above noted transaction hereby acknowledge that the above described transaction is terminated and release each other and the Brokerage in the proposed transaction, from all liabilities, covenants, obligations, claims and sums of money arising out of the above Agreement of Purchase and Sale, together with any rights and causes of action that each party may have had against the other and/or the Brokerage.
In essence both parties are releasing all parties from the transaction and they agree that no further legal action will be taken against each other or the Brokerage(s). The Mutual Release goes on further to state what the deposit amount is and who it is to be made payable to, typically it’s the Buyer.
Having been in real estate for over 20 years, I have only had one sale that did not close. I was representing the Sellers and in the Agreement of Purchase and Sale we had everything covered to protect the Seller’s interest and further, we had disclosed all of the pertinent facts about the property in the listing and elsewhere so the Buyer had no legal right to abort their purchase. At the end of the day, it appeared the Buyers just lacked the required funds, the sale became null and void, both parties signed a Mutual Release and we proceeded to sell the property to someone else.
When either the Buyer or Seller is less than agreeable about mutually terminating an Agreement and releasing each other from any further obligations, it can get much more complicated and messy. In severe circumstances the matter may end up in court. If the Buyer loses their argument, the listing Brokerage can under “court order” release the Buyer’s full deposit to the seller but it may not end there. If the Seller sells the property to another Buyer for a lesser amount, the court can also order the Buyer to reimburse the Seller for the difference in sale price between themselves and Buyer #2. Even if there is no difference in sale price, the Seller(s) will have incurred added carrying costs for taxes etc. and the court may rule that Buyer #1 is responsible for those coats as well.
No matter the outcome, these situations can be very stressful for both the Seller(s) and Buyer(s). Our role as REALTORS® is to provide fiduciary duties for our clients, always looking out for their best interests whether they are buying, selling or both. As REALTORS® we earn no money until a sale is completed and closed. No amount of money is worth having unhappy clients who were not served with the best of intention and I have always based my real estate business by striving to meet this simple goal. In matters that are of a specific legal or accounting nature, our Code of Ethics dictates that we urge clients to seek professional advice in areas beyond our expertise.
As always I remain open to your comments and or questions with respect to your specific real estate related goals, objectives or issues so please do not hesitate to Contact Me for a no obligation discussion in that regard, I am always happy to assist you in any way I can especially in these challenging times.