In a recently reported decision (Tang v. Zhang 2013 BCCA 52), a five-panel bench of the Court of Appeal for British Columbia considered the interpretation of deposit clauses in standard form contracts regularly used by real estate agents in B.C. In this case, the buyer had failed to complete a real estate purchase pursuant to a standard form contract. The main issue before the Court was whether the sellers were entitled to the deposit as of right or whether the sellers must first prove that they suffered damages because of the buyer’s breach of contract. The B.C. Court of Appeal has clarified that under a standard form residential contract of purchase and sale, if the buyer fails to complete, the seller is entitled to claim the deposit without the need for proving damages. The Court summarized the principles relating to deposits under standard real estate contracts as follows:
- On a general level, the question of whether a deposit or other payment made to a seller in advance of the completion of a purchase is forfeited to the seller upon the buyer’s repudiation of the contract, is a matter of contractual intention;
- Where the parties use the word “deposit” to describe such a payment, that word should, in the absence of a contrary provision, be given its normal meaning in law;
- A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and is not dependant on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price;
- The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of such an amount that the seller’s retention of it would be penal or unconscionable, the Court may relieve against forfeiture, as codified by the Law and Equity Act;
- A contractual term that a deposit will be forfeited “on account of damages” if the buyer fails to complete does not change the nature of a deposit, but may be construed to mean that if damages are proven, the deposit will be applied against (“on account of”) them. If no damages are shown, the deposit is nevertheless forfeitable, subject always to the expression of a contrary intention in the contract.
If you would like more information or require legal advice regarding contractual claims or disputes, please contact one of the lawyers in our business law or strata law groups.