“I have signed a contract to buy a house, but I regret the decision and no longer wish to proceed with the transaction. Can I get my deposit back?
In real estate transactions, some buyers may change their minds after signing a purchase contract and removing conditions, due to changes in their own financial situation or changes in the overall market. This is particularly common when buying pre-construction properties, as the time between signing the contract and completion can be quite long, during which unexpected changes may occur. What are the consequences for the buyer in such cases? Usually, the buyer has already paid a significant deposit, and they may wonder if they can get it back.
Under common law, this situation is called a breach of contract. The party that breaches the contract is required to compensate the innocent party for any actual losses suffered. If there are no losses, there is no compensation. In many transactions, a deposit cannot simply be forfeited because it often does not correspond to actual losses. Even if the contract stipulates that the deposit will be forfeited, the court often deems this to be a penalty clause and declares it invalid. Does this mean that if the seller can relist the property at the original price and sell it, or even sell it at a higher price in a good market, without actually suffering a loss, the buyer can get the deposit back?
The case of Tang v. Zhang, 2013 BCCA 52, tells us that it is not so easy for the buyer to get the deposit back. In this case, a buyer named Zhang and a seller named Tang signed a contract to purchase a property for a total price of $2.03 million. The buyer paid a deposit of $100,000. The contract stipulated that the deposit would be absolutely forfeited on account of damages if the buyer breached the contract. When the buyer breached the contract and did not want to proceed with the transaction before completion, the seller quickly resold the property at a higher price. The British Columbia Supreme Court ruled that the buyer could get the deposit back, based on the general rule of breach of contract under common law, that there is no compensation if there is no loss. However, the seller appealed the decision to the British Columbia Court of Appeal, which overturned the Supreme Court ruling, holding that the deposit could not be refunded.
The reason for the Court of Appeal’s decision is based on a decision by an English court over a hundred years ago, Howe v. Smith (1884) 27 Ch. D. 89 (C.A.). This decision held that in real estate transactions, a deposit is a form of earnest money used to bind the transaction and encourage the buyer to complete it. Once the buyer breaches the contract, the deposit cannot be refunded. The Court of Appeal held that this English decision had been adopted by Canadian courts, and therefore should be applied in this case. Therefore, the seller, Tang, even though he suffered no loss as a result of the buyer’s breach and actually profited from the resale of the property, had the right to keep the deposit, making a double profit.
However, the Court of Appeal also cautioned against harsh forfeiture of deposits, holding that the forfeited deposit must be a reasonable amount. Although the court did not directly indicate what constitutes a reasonable amount, deposits in real estate transactions generally range from 10% to 20% of the transaction price. If the deposit is not far from this range, the court is likely to consider it reasonable. If it exceeds this range by a significant amount, the court may consider reducing it at its discretion.
Has the controversy over deposits in real estate transactions been settled? It is worth noting that this case is a decision of the British Columbia Court of Appeal, which means that if there are similar cases, they will generally follow this case’s ruling in BC province. However, the Supreme Court of Canada has not directly ruled on this issue. Since the amount of deposits is often substantial, forfeiting the deposit when the seller resells the property at a profit in a good market may not be fair to the buyer. Perhaps in the future, the Supreme Court of Canada may revise this over a hundred-year-old English precedent based on current circumstances, but the timing of such changes is unpredictable.
Therefore, buyers in real estate transactions need to be particularly cautious and ensure that they can complete the transaction on time; otherwise, there is a risk of forfeiting the deposit. In a bad market, buyers face even greater risks because if the seller resells the property at a loss greater than the deposit, the buyer may have to pay the difference in addition to forfeiting the deposit.
Post Date: February 5, 2023