A recent Court of Appeal judgement, Tang v. Zhang, has moved towards clarifying the law surrounding the forfeiture of deposits in British Columbia real estate transactions when the purchaser fails to complete.  The case in question involved a property in Vancouver in which the plaintiffs, Mr. and Mrs. Tang and defendant, Mr. Zhang entered into a contract of purchase and sale for the sale of the Tang’s property in the amount $2,030,000.  The defendant paid a deposit of $100,000 upon removal of the subject conditions.

Subsequently, it became clear that the defendant was unable or unwilling to complete the purchase of the property.  The plaintiff’s then made a claim for the deposit in accordance with their interpretation of the contract of purchase and sale.  It should be noted that the contract used in this instance was the standard contract used by the Greater Vancouver Real Estate Board.

The plaintiff’s were able to sell the property to a third party, for a higher price than they would have sold the property to the defendant.  However, the defendant did not agree to the deposit being paid out to the plaintiffs as in accordance with his understanding of the contract of purchase and sale, the deposit should only be paid to the plaintiff’s if they had suffered any damages. The defendant argued that as the plaintiffs had been able to sell the property at a higher price, they did not suffer any damages and were actually better off.

The case was heard in the Supreme Court of British Columbia in February, 2012. The Supreme Court decided in favour of the defendant and determined that as there were no damages suffered by the plaintiffs, they were not entitled to the deposit and the defendant could have the deposit returned.

The plaintiffs appealed to the British Columbia Court of Appeal, wherein the court reviewed the case law precedents that exist in British Columbia.  The Court of Appeal determined that the current case law was not correct and overturned the Supreme Court’s decision.

The Court of Appeal decided that based on the interpretation of the contract, the deposit was not refundable to the defendant.  They also determined that the plaintiffs did not have prove that they had suffered damages in order to claim the deposit.  The ruling determined the following guiding principles for deposits made in real estate transactions:

  1. ” On a general level, the question of whether a deposit or other payment made to a seller in advance of the completion of a purchase is forfeited to the seller upon the buyer’s repudiation of the contract, is a matter of contractual intention;
  2. Where the parties use the word “deposit” to describe such a payment, that word should in the absence of a contrary provision be given its normal meaning in law;
  3. A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains.  Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and is not dependant on proof of damages by the other party.  If the contract is performed, the deposit is applied to the purchase price;
  4. The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages.  However, where the deposit is of such an amount that the seller’s retention of it would be penal or unconscionable, the court may relieve against forfeiture, as codified by the Law and Equity Act; [1]
  5.  A contractual term that a deposit will be forfeited “on account of damages” on the buyer’s failure to complete does not alter the nature of a deposit, but may be construed to mean that if damages are proven, the deposit will be applied against (“on account of”) them.  If no damages are shown, the deposit is nevertheless forfeitable, subject always to the expression of a contrary intention.”

It should be noted that following the judgement in the Supreme Court of British Columbia the standard real estate contracts used in British Columbia were amended to insert the words “non-refundable” to make it clear within the contract that the deposit is not refundable.

What does this mean for purchasers? If you are unable to complete a purchase after entering into a contract of purchase and sale and removing subject conditions, you must be prepared to lose the deposit you have paid.

 Update: Please review our UPDATE on another recent British Columbia Court of Appeal decision on a similar matter.

[1] Note: The Court of Appeal suggested that a deposit of 10% would not be considered unconscionable.