By S. Twining and S. Gladders, Twining, Short & Haakonson
September 2024
As an essential ingredient of a typical real estate transaction, it’s difficult to envision a real estate contract that doesn’t require a buyer to promptly pay a deposit as part of a purchase. A deposit demonstrates the buyer’s serious intent to purchase the property, and provides the seller with security if the buyer breaches the contract.
Absent clear wording to the contrary, the deposit is forfeited to the seller in the event of a buyer default, regardless of whether the seller has suffered damages, which means decisions involving deposits need to be treated with careful consideration in keeping with their importance.
The ABCs of deposits
All parties to a contract and their licensees need to be aware that the nature of the deposit and its terms are governed by the wording of the contract of purchase and sale, specifically Section 2 of the standard form contract approved by the BC Real Estate Association which sets out the:
- amount of the deposit – there is no clear guidance regarding what constitutes a “reasonable” deposit but amounts of up to 20% of the purchase price have been found by the courts to be reasonable.
- date it must be paid – within 24 hours of acceptance, unless indicated otherwise
- party to whom the deposit will be delivered – generally, paid into a brokerage trust account, but the parties may choose to waive the Real Estate Services Act trust requirements.
Proposing changes to standard wording
If there are any proposed changes to the standard wording of Section 2 of the contract, licensees should read the proposed changes carefully and consider referring their client to a lawyer for independent legal advice, as any amendment may have significant legal consequences for their client.
The standard language requiring that the deposit be paid within 24 hours of acceptance, is commonly amended to change the timeframe for payment. But the buyer should be aware that Section 12 of the contract affirms that time is of the essence and, therefore, it’s an essential requirement of the contract that the buyer pay the deposit promptly in accordance with whatever time requirements are indicated in Section 2. Failure to do so may amount to a contract breach and enable the seller to sue for forfeiture of the deposit as liquidated damages.
Paying a deposit: manage this step carefully
Section 2 says the deposit will be paid in accordance with Section 10 or by uncertified cheque. Section 10 requires that all monies tendered or paid by the buyer to the seller must be paid by certified cheque, bank draft, wire transfer or trust cheque from a lawyer/notary or real estate brokerage.
Licensees should strongly caution buyers who choose to use bank drafts and certified cheques to take great care in handling those instruments and licensees themselves should take the same care. Bank drafts and certified cheques are similar to “cash” and cannot simply be stopped or cancelled like regular cheques in the event they go missing. Unless the instrument can be recovered and returned to the bank, the bank must hold back the funds and honour the instrument for up to 10 years after it’s been issued.
Some financial institutions will provide a replacement instrument if the buyer provides a sufficient guarantee or security for the funds, but it will be difficult for most buyers to replace such a large sum of cash within the timeframe required for paying the deposit and licensees must be aware that a lost bank draft or certified cheque might deprive their client of access to the original funds for a period of 10 years. In some circumstances, a court order may be required to obtain a replacement instrument, which will add to the time and cost to fix the error. For more information on this, read Jude Chow’s March 2021 Risk Report article “Bank drafts: don’t let the dog eat them.”
Finally, licensees should warn buyers of the serious risk that a court may find that their deposit will be unconditionally forfeited if they fail to complete the contract for any reason following subject removal.
The British Columbia Court of Appeal held in Tang v. Zhang, 2013 BCCA 52 that, absent clear language in the contract to the contrary, a reasonable deposit paid in a contract will be forfeited in its entirety upon a buyer failing to complete a purchase in accordance with the terms of the contract, regardless of whether or not the seller has actually sustained damages.
Potential pitfalls of paying a deposit to third parties
The Real Estate Services Act trust account provisions are intended to protect the buyer’s deposit until the transfer of title takes effect on completion of the contract. So the typical transaction would involve:
- a licensee receiving a deposit from a client – with the licensee being obligated to promptly deliver the deposit to their brokerage. The brokerage is then obligated to promptly deposit the funds into its trust account.
There are real estate transactions, however, where the parties wish to have the deposit released directly to the seller or to be held by a third party other than a real estate brokerage. In our practice, this type of situation is most common in development properties, where the seller/developer wants to use the buyer’s deposit to help fund the development.
While Section 27(4) provides room for an exception to this general rule where the parties intend the deposit to be held by another party, there are requirements that need to be met for this exception to apply:
- all parties to the transaction must enter into a written agreement, separate from the contract of purchase and sale, confirming that Sections 27(1) and (2) of the Act do not apply; and
- any conditions established by the Real Estate Service Rules must be met. In this case, Section 68 of the Rules provides that the licensee or brokerage must ensure that the funds are immediately paid to the designated third party. To assist in such situations, some Real Estate Boards have created a template agreement wherein the parties expressly waive the requirements of Section 27(1) and (2) and specify the person, other than the brokerage, who will receive the funds.
Advising clients of the risk of paying deposits to third parties
While the Act permits deposits to be held by parties other than a brokerage as an exception to Section 27(1) and (2), licensees must be aware of the potential risk to the client if the deposit isn’t secured in a brokerage trust account, and provide your client with appropriate advice before they agree to this contract term.
In most cases, it will be the seller who is asking for the exception because they want access to the deposit funds for their own use prior to closing. There are risks to the buyer in this type of scenario because, without the security of the Act’s trust provisions, the deposit may be spent before closing and the funds may not be recoverable from the seller if the transaction fails to complete.
To provide the buyer with some security, releasing the deposit to the seller is usually conditional on the seller agreeing to register an Option to Purchase on title to the property, which grants the buyer the option to complete the purchase at any time up to close of business on the completion date. Registering the Option on title preserves the buyer’s beneficial interest in the property until the Option is exercised or expires and protects against the sale of the property to a third party while the Option is extant.
Although a properly drafted Option provides some protection to the buyer, the buyer may still be at risk. At the end of the day, an Option is only as good as the seller’s equity interest in the Property at the time of registration, and licensees must exercise care in reviewing title to confirm the existence of other interests who may claim priority over the buyer. In our office, we have defended several claims in which the buyer’s agent did not properly warn the buyer of this risk and there was insufficient equity in the property to support the Option.
The most common example of this is where there are multiple mortgages on title at the time of the Option and the seller wishes to use the deposit to defray their financing obligations. If the seller is unable to satisfy these obligations, one or more of the mortgagees may foreclose, and the buyer, as the secured party with the lowest priority, may end up with nothing.
Special rules also apply in the case of development property. The Real Estate Development Marketing Act specifically requires a developer to hold the deposit in trust with a brokerage, lawyer, notary or prescribed person, unless certain requirements set out in Sections 18 or 19 of the Act are met. Licensees have faced discipline by the regulator for releasing deposit funds to a developer without ensuring that the requisite trust conditions are in place.
Ultimately, when the parties to a transaction contemplate making a direct deposit to the seller or seller’s agent, licensees need to exercise caution and ensure that the client is aware that they are agreeing to something that is unusual and risky. As a licensee, it’s important to confirm your advice to the client in writing and specifically direct them to speak with a lawyer about the risk of agreeing to make a direct deposit to the seller. It’s essential that the client have the benefit of legal advice not only to review the terms of the contract relating to the deposit but also when it comes time to review the Option to Purchase or other security instrument that may be registered to protect the buyer’s interests.
The bottom line: the deposit terms in a contract are important and failing to properly understand and advise a client on the significance of these terms may expose the client and the licensee to significant risk.
The standard wording in the contract of purchase and sale is there for a reason: to protect the parties. Changing the standard wording removes this protection and creates risk, so the client should fully understand the risk and gauge whether it’s one worth taking by seeking professional legal advice.
Best practices for advising clients on deposits
Licensees should clearly advise their clients of the following general considerations/risks concerning the handling of deposits:
- Deposits must be paid promptly in accordance with Section 2 of the contract, using an accepted method of payment;
- Bank drafts and certified cheques are similar to “cash” and must be handled carefully;
- Failure to pay a deposit on time may constitute a breach of contract and entitle the seller to claim damages in the amount of the unpaid deposit;
- Unless explicitly specified otherwise, if a buyer fails to complete on a contract, a court may find that the deposit will be forfeited to the seller without proof of damages; and
- Paying a deposit to anyone other than the brokerage or a lawyer/notary can be very risky and legal advice should be obtained.
