Deposits on Purchase and Sale Agreement

Today I was reading an article about deposits by Mark Weisleder, a well known real estate lawyer in Toronto. He has always had some interesting points.
I have often told my clients that submitting an offer to a Seller is like playing bridge. You are trying to communicate non verbally as much as possible about your intentions; your seriousness as a Buyer and your strength as a buyer among other things. Your strength and willingness can be conveyed in different ways. Some people might argue that the very fact they are submitting an offer should convey this. However, we all know that there is always another property and some buyers are really just trying to buy a property at a rock bottom price.
Your deposit is one method to convey non verbally to the Seller and the Seller’s representative a few things about you as a Buyer. Some markets have traditions where they give a standard 5% of the purchase price as a deposit, others it is merely a stipend. In all cases in Ontario it is the deposit that seals the covenant for the contract to take effect. Unless otherwise stated, the deposit must be received by the Seller’s representative within 24 hours of acceptance of the Agreement.
If the Buyer fails to deliver to the Seller’s representative the deposit within the time period stated, the Seller has the right to cancel the agreement and sell the property to another Buyer. It clearly outlines in the contract that the time will be honoured and this means for all notices and deposits.
The deposit also can provide a sense of confidence to the Seller about the Buyer. If the Buyer is coming in without a financing clause, the Seller may feel better if the buyer is able to write a more substantial deposit cheque to secure the sale.
Sellers often wonder why they cannot hold onto the deposit and what happens if the Buyer fails to close. First of all, the deposit is held in trust by the Selling brokerage, which is protected against fraud or bankruptcy by insurance. Whatever the deposit amount, it does not mean that the Seller gets to keep the deposit should the Buyer fail to close. If the Buyer should fail to close on the agreed upon time and has no intention of closing, he does not necessarily get his deposit back. The Seller and Buyer must agree by signing a mutual release in order to release the funds. If they fail to agree then often a judge must become involved.
I had a Seller who sold a condo with a financing clause and a status certificate.  The financing was not a problem. The Buyers included several pieces of furniture and negotiated very hard with the Seller. During the conditional period there was a change in the Buyer’s circumstances and they decided not to purchase the property. They told their lawyer to cancel the request for the status certificate and then refused to firm up and based this on the status certificate condition. However, since they had never obtained the status certificate it was difficult to argue that they escaped because of the outcome of the status certificate. The Seller refused to release the deposit and went to small claims court and was awarded the deposit. The judge decided that the Buyer did not act in good faith to satisfy their status certificate condition.
Once you have agreed on terms and the property is conditionally sold a Buyer cannot just change their mind on the purchase and not pay the deposit. In this instance a Seller may sue the Buyer for damages and must mitigate their loss. In other words, the Buyer would be responsible to the Seller for the difference the Seller loses from the original agreement from the defaulted Buyer to the final agreement. The deposit remains in the trust account until there is a mutual release signed by both parties or a judge decides how this will be dispersed.
One way of avoiding problems is by submitting the offer with a stipend and placing a larger sum upon removal of all conditions. This is often easier especially if you are on a buying trip and must buy a house. If the conditions are not able to be fulfilled because of a house inspection and you still need to move on and buy a house, putting all your eggs in one basket can be a bit of a challenge. The deposits usually take about 10 days to be returned. This does cause frustration for some but the explanation is valid. The brokerage must wait for the original cheque to clear before re issuing the Buyer their money. In the past, people have practised fraud using cheques with insufficient funds and asking for a refund before the cheque clears. Hence, waiting for the cheque to clear is all part of the process.
So when you are buying a property and have not been through the process for a long while, review the process with your agent before you sign the offer. This way you will avoid any unnecessary frustration.