Who Gets to Keep the Deposit?

Reading Time: 4 minutes

"When sh*t hits the fan".

That's the only time we care about deposits.

But a little proactive knowledge makes you more valuable to your clients.

A "deposit", by nature, is to ensure that one party holds up its end of the bargain.

For that to be true, the party has to lose the deposit when they don't.

So, in a real estate transaction when a buyer defaults on the Agreement, the seller is entitled to keep the deposit - even when there are no damages.

Yes, even when the seller re-lists the property the next day and sells for more money, they're entitled to keep the original deposit. That's what the case law says.

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.

There is, of course, an exception to this rule:

"Relief from Forfeiture".

This exception allows the defaulting buyer to ask the court to "reconsider" whether they should lose their deposit. The court will grant this if they believe that:

1) The deposit is out of proportion to the Seller's loss;
AND
2) It would be unconscionable not to grant relief.

They look at all the facts including; the relative bargaining power of the parties, their relationship, sophistication, negotiations, fairness, conduct, and communication.

To give you an idea, we have case law with deposits as high as 25% of the purchase price where the seller got to keep the deposit. 

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

Drafting the Agreement of Purchase and Sale
Most Agreements that come across my desk have the deposit amount filled out on the first page and nothing more about it.

Don't forget - Realtors have control over the most important document in a real estate transaction.

You draft the Agreement - the lawyers execute it. So next time you're drafting or negotiating, consider this:

When Representing a Seller: Negotiate a higher deposit
The deposit has real value. If something goes wrong at closing, your seller has a much better chance of keeping at least that amount. They only have to prove the buyer's default, not the damages. Explain this to your clients next time and show your value as their Realtor.

When Representing a Seller: Add a forfeiture clause
Don't be afraid to add language in Schedule A. Add a clause that clarifies that the deposit is forfeited in the event of default by the buyer. This ensures that the buyer is serious and it strengthens your client's position if there is an argument. Talk with your Broker of Record or Real Estate Lawyer for wording and sample clauses.

When Representing a Buyer: Limit your client's exposure
Yes - do the opposite. Your job is to represent your client and when that client is the buyer, keep the deposit lower. Now, you shouldn't be representing clients that intend to breach an Agreement, but hey, sometimes things happen. Protect your clients and limit the forfeiture amount.

When Representing a Buyer: Get creative
Real estate is mostly contract law - and that means you can contract out of certain rules. Have leverage in a negotiation? Stipulate that the deposit is completely refundable even when the buyer breaches - yes, the buyer may still be liable for damages, but the seller now has to prove them.

I also noticed that the case law relies on the definition of "deposit". If certain funds aren't considered a "deposit", a court may decide differently. What if the money paid to the seller was a "pre-payment of the purchase price"?

The point is don't be afraid to get creative and draft better Agreements. At a time when there are almost as many agents as there are transactions - be better.