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Two Sides, One Coin: The Nature of a Deposit and Who Gets to Keep It - Ross Barristers Professional Corporation

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Two Sides, One Coin: The Nature of a Deposit and Who Gets to Keep It

in Civil Litigation Real Estate by admin / October 22,2019

Imagine you agree to sell your property to an individual purchaser “in trust for a corporation to be incorporated [i.e. a promoter] without any personal liabilities”. This is not uncommon. However, things, as they sometimes do, fall apart. The transaction doesn’t close. The individual wants his deposit back but you think you have a right to keep it. Your agreement includes the standard form language providing that the deposit is “to be held in trust pending completion or other termination of this Agreement and to be credited towards the Purchase Price on completion.” Who gets the deposit?

Liability of promoter

By default, a promoter is personally liable for any contracts entered into (Ontario Business Corporations Act, R.S.O. 1990, c. B.16, s.21(1)), unless he contractually opts out (s.21(4)). If a promoter has “no personal liabilities”, does that mean he is entitled to the deposit, even if it was he who breaks the agreement?

The Court of Appeal in Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149, answered no. To have “no personal liability” means that the promoter cannot be sued for damages for breach of contract; however, the promoter may be bound by the terms of the deposit. Of course, the parties may contract out of this as well, but in the case of Benedetto, they had not.

The Court was guided by the nature of a deposit. A deposit isn’t just a part payment towards the purchase price. A deposit is also a form of security to incentivize the parties to complete their bargain. On the one hand, the deposit motivates the purchaser to close, or else, he risks forfeiting it. On the other hand, it’s also a form of compensation to the vendor for (1) taking its property off the market and (2) revealing how much it is willing to sell the property for.  

If the vendor cannot sue the promoter or the corporation, which may not even have been formed, it is not difficult to see why the vendor is entitled to the deposit in this case.

Can a deposit be used to set-off damages?

The Court of Appeal was again asked to consider what happens to the deposit in Azzarello v. Shawqi, 2019 ONCA 820. The individual purchaser (not a promoter) failed to close. The question was whether the deposit would be applied to the damages award or whether the vendor could keep the deposit in addition to the damages award. The Court concluded that the deposit should be applied to the damages award.

The Court reviewed the 4 outcomes of an agreement where the disposition of the deposit must be determined:

  1. Where the agreement is completed, the deposit is put toward the purchase price;
  2. Where the vendor breaches, the deposit is returned to the purchaser; if the purchaser has suffered any damages, it may sue for them, and in appropriate cases, for specific performance;
  3. Where a purchaser fails to close but the vendor suffers no loss, the deposit is forfeited, subject to relief from forfeiture;
  4. Where the purchaser breaches, and the vendor suffers loss, the Court of Appeal concluded that the deposit is treated as part payment for the damages suffered as a result of the loss, given that the measure of damages is based on the vendor receiving the purchase price it bargained for.

The fate of the deposit is governed by the agreement, most commonly in standard form. Unless the agreement very clearly states otherwise, the above scenarios are going to be the standard outcomes.

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Our associate Vladi Ivanov successfully represented the respondent vendor at the Court of Appeal in Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149.