Can I Keep That Real Estate Deposit If The Purchaser Walks?

This was the question put before the British Columbia Court of Appeal in the recent decision of Tang v. Zhang 2013 BCCA 52. In the purchase of a $2 Million property in Vancouver, the Purchaser had put down a $100,000 deposit. In a normal purchase of real estate this deposit is credited against the purchase price at closing. The sale did not close as planned as the Purchaser elected to walk away from the contract and refused to complete. The Seller, who wanted to make the best of a bad situation, re-listed the property and sold to a third party buyer at a higher price than had been negotiated with the first Purchaser.

Despite doing quite well on the second contract, the Seller nonetheless sued the first Purchaser for the deposit. The Seller claimed that the deposit was ‘non-refundable’ and that the Seller did not have to prove that they suffered any damages in order to keep the deposit. The Purchaser disagreed and argued that as the Seller was not out-of-pocket and had not proven they suffered any damages, so the deposit ought to be refunded to the Purchaser.

The Court of Appeal reviewed prior decisions on deposits dating back to the late 19^th century and looked at similar real estate contracts as to what had been signed between the Seller and the Purchaser. Ultimately the court came to the conclusion that a deposit is an “ancient invention of the law designed to motivate contracting parties to carry through with their bargains.” The deposit will be forfeited to a seller without proof of damages provided the deposit is not ‘excessive.” While the Court of Appeal did not provide any hard and fast rule as to what ‘excessive’ may be, the court did note that in general a deposit of up to 10% of the purchase price is regarded as reasonable, and perhaps even up to 20% on some transactions.

This case is important for realtors who regularly advise their clients as to what amount to place as a deposit on a real estate transfer. It is important that the deposit is reasonable in the circumstances. As a purchaser you will want to keep the deposit low and as a vendor make it higher, but not too high.