Buyers out $10,000 as house deal falls apart

If a house deal falls apart because the buyer can’t close and the seller then sells the property to someone else for more, who gets the deposit?
Here’s what can happen:

In early September 2003, Shankar Iyer and Bala Ramachandran agreed to pay $289,000 for a new home from Pleasant Developments Inc. They accompanied their offer with a $10,000 deposit and the builder accepted it on September 16.

The buyers got cold feet and the next day changed their mind, asking for the return of the deposit.

The builder refused to return it and resold the house for $700 less than the original deal, but kept the deposit. The couple sued in Small Claims Court for the return of the deposit. When it came to the hearing, the question for the court was whether the builder could keep it all.

The judge decided the builder could only keep $700 — the amount by which the sale was reduced — and was ordered to give the balance of $9,300 to the buyer.

The builder appealed. Three years later, Judge Brown of the Ontario Superior Court of Justice decided the builder could keep the entire deposit, even though he did not suffer any loss.

He quoted the law on the subject as follows:
“Even in the case where the seller re-sells at a purchase price that is high enough to compensate for any loss from the first sale, the seller may nevertheless retain the deposit.”

What this means is that, where it is the buyer’s fault that a deal does not close, the seller can keep the deposit. There is an exception to this rule if the amount of the deposit is out of all proportion to the losses suffered. In those cases, the loss of the deposit may be considered a penalty and then it will not be paid to the seller and will be returned to the buyer.

The buyers tried to argue that the loss of the $10,000 was out of all proportion to the losses suffered by the seller. The judge noted that the deposit paid was only 3.6 per cent of the purchase price.

In my opinion, the deposit would have to be greater than 10 per cent of the purchase price in order for the buyer to recover it if the seller suffered little or no damages.

Here are the lessons:
1.Understand your rights are before you sign a real estate contract and make a deposit.
2.If you are a buyer, understand that once an agreement is signed and accepted, you cannot simply change your mind, even one day later.
3.If a buyer defaults on their obligations, then not only can the seller sue for any damages, they can in most cases sue for the deposit, even if they have suffered no damages at all.
4.If a matter goes to court, any deposit will remain in the real estate brokerage trust account until the parties sign a mutual release or the matter is decided by a court, which in this case, took more than 2 years.

This story is written by Mark Weisleder, a Toronto real estate lawyer in www.moneyville.ca