What Happens if the Buyer Defaults on a Real Estate Contract?

When the buyer defaults on a real estate transaction, we first look at the deposit. A "deposit", by nature, ensures that one party holds up their end of the bargain. So when that party doesn't hold up their end of the bargain, that deposit becomes subject to forfeiture.

To clarify, in an Ontario real estate transaction when a buyer defaults on the contract, the seller is entitled to keep the deposit - even when there are no damages.

This includes situations where the seller re-lists the property and sells for more money, they're still entitled to keep the original deposit.

And if that same seller re-lists the property and sells for less money, they're entitled to keep the deposit and sue for damages.

That's what the Ontario Case Law says.

There is, of course, an exception to this rule: "Relief from Forfeiture".

This exception allows the buyer to ask the court to "reconsider" whether they should lose their deposit.

The courts will grant this if:
1) The deposit is much larger than the Seller's loss;
and
2) It would be unconscionable not to grant relief.

Unconscionable means that it would be extremely unfair based on all the details of the case.

To give you an example, we have case law with deposits as high as 25% of the purchase price, where the seller got to keep the deposit, without it being deemed unconscionable.

In other words, it's rare for the courts to grant this.

Key Takeaways

Pay Attention to the Deposit Amount
The deposit has real value. If the deal goes south because of the buyer, the deposit will likely be forfeited, regardless of damages. When you're the seller, secure as high of a deposit as possible. When you're the buyer, it's in your best interest to limit this amount.

Add a Forfeiture Clause in Schedule A
This is a great way to make sure the buyer is serious and it strengthens your client's claim to the deposit if something goes wrong. Talk to your Broker of Record or a real estate lawyer about drafting this clause.

Get Creative
Instead of providing a higher deposit, provide some funds as a pre-payment of the purchase price. In the event of a default, these monies might not be considered a deposit, and therefore not subject to the forfeiture rules. Again, talk to your Broker of Record or a real estate lawyer about drafting this.