When it comes to agreements of purchase and sale of real estate, there are many intricacies. Of course, real estate law will govern many parts of the transaction, however, the underlying principles are those of contract law. In this post, I want to talk about the deposits submitted with the offer to purchase and their effect on the validity of the agreement.
Before we dive into the subject, let’s briefly discuss the basics of contact formation. For a contract to be valid, there must be an offer, acceptance and consideration. In a real estate transaction, the buyer normally submits an offer for the seller’s review, the seller will in turn accept that offer (if everything is to their liking) by signing the agreement, and the consideration would be the purchase price that the buyer agrees to pay on closing of the transaction. Nonetheless, it is common practice for the buyer to deliver to the seller a deposit with or upon acceptance of their offer so much so that the OREA Agreement of Purchase and Sale has a clause where the parties can easily communicate the amount and the timing of the provision of this initial deposit. The deposit shows that the buyer is serious about their intention to close on the property, and those funds are counted towards the total purchase price on closing.
What happens when this partial consideration is not paid to the seller in accordance with the terms of the agreement? Was the agreement entered into? If so, was the agreement rescinded? Can the seller pursue damages against the buyer? Keep reading to find out.
BECKETT V AHMED
These questions have recently been discussed by Ontario Superior Court of Justice in the case of Beckett v. Ahmed, 2023 ONSC 6993. In this case, the sellers received an offer for their property for $1.2M, they signed this offer back and sent it to the buyer. The buyer was supposed to provide the deposit to the seller upon the acceptance of the offer. The buyer informed their real estate agent that they were unable to secure the funds required for the deposit (or the purchase) and instructed their agent to draft a mutual release to be signed by the parties. The seller advised that they were not prepared to execute a mutual release and proceeded to find another buyer for the property. Although this might seem strange, keep in mind that in order to pursue damages from the buyer, the seller is required to mitigate their damages – in this case, they were required to find another buyer for their home. The property was sold for $1.13M, $70,000.00 less than the original purchase price. The seller then proceeded to pursue damages against the original buyer for the difference. Did they win the case? They sure did, the Judge found that there was a binding agreement of purchase and sale, and the original buyer was ordered to pay the $70K to the seller as damages which the seller suffered due to the buyer’s default.
The judge upheld the existing law that non-provision of the deposit does not affect the creation of a valid and binding agreement of purchase and sale. The court based their reasoning on 460641 Ontario Co. v. Weiss, [1984] O.J. No. 865 and Kearns v. Randall, [2006] O.J. No. 2507.
Although this decision is far from a breakthrough in real estate law, it further supports the established law that the agreement of purchase and sale of real estate is formed once the offer is accepted by the seller. The purchaser cannot claim that by not providing a deposit on time the agreement is terminated. What does end up happening is that the buyer defaults on their obligations under the agreement and the seller is entitled (subject to certain requirements) to pursue damages against the buyer should they resell their home for a lower price.
WHAT DOES THIS MEAN TO YOU?
How does this decision affect you as a buyer? Well, this case shows the importance of having your finances in order when you submit an offer to purchase a house. Having the deposit funds ready on the day of the offer is imperative to ensure that there are no complications, and the transaction is smooth sailing. You can read more about the steps of purchasing in the linked blog post to prepare yourself for your property purchase.
Remember that buying a home is a complicated process and unless you are buying homes every other week, having a team of knowledgeable professionals to advise you at every step of the way will make the whole process less stressful for you and your family.
