Understanding the Deposit in a Real Estate Transaction
The deposit
A deposit on a real estate transaction is regarded as consideration by the buyer to the seller to sell their property at a future date. If a deposit is not given upon acceptance or with delivery of an accepted offer, the agreement will not be binding. Therefore it is imperative that a buyer delivers the deposit in order to secure the transaction. The amount of deposit is generally negotiated between the buyer and seller. The seller will try to get the largest deposit possible to deter the buyer from default and conversely the buyer will want to provide a smaller one in case they default. The rule of thumb on a typical transaction is five percent (5%) up front however often buyers can negotiate deposits to be paid in installments or upon waiving certain conditions.
The Ontario Real Estate Association standard form agreement of purchase and sale (OREA Agreement) gives two options regarding the timing of deposits. While the first is to have the deposit presented with the offer, the second is to have the deposit paid upon acceptance. According to the Regulations to the Real Estate and Business Brokers Act, which is administered by the Real Estate Council of Ontario, an agent is required to place the deposit in his or her brokerages trust account within two banking days of receipt. The deposit should always be in a certified form because if it is not, the Broker would have to wait for clearance, thereby postponing the actual delivery of the said deposit and allowing for the parties to renege on the offer (because delivery of the deposit has not happened) and or cancel the payment. If a ceritifed deposit is paid on acceptance of the Offer, this difficulty is avoided. The OREA form has a space to insert information as to whom the deposit is paid. When a property has been sold through a listing brokerage, it is usual to pay the deposit to the listing broker because the listing broker will apply all the realty commissions directly from the deposit upon successful completion of the transaction. Should the property be sold without a broker, the deposit would should be paid to the seller’s solicitor in trust. If the deposit is paid directly to a seller, there is a risk to the buyer of losing his or her deposit where the seller is selling fraudulently and is not the true owner. A Seller demanding that the deposit be paid directly to them is definitely a “red flag” situation that real estate fraud is possibly occurring.
Lastly, upon a breach of contract i.e. either the buyer or seller is either unable or unwilling to complete the transaction, the deposit does not serve as a penalty but rather a quantum of damages. Therefore if the defaulting party provided a deposit that was way above and beyond the damages suffered by the innocent party, the innocent party would not be necessarily entitled to all of the deposit. When default occurs, real estate brokerages will not release a deposit until a mutual release is signed. If a mutual release is not signed, the parties will have to litigate in order for the brokerage to release the monies into court pending a resolution of the matter. Brokerages do not want to be liable for giving away monies that are the subject of litigation or potential litigation. This is also the case when deposits are given to a lawyer’s trust account, however the benefit in keeping it in a lawyer’s trust account is that a lawyer can negotiate a release of the deposit hopefully before the parties enter into litigation.
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