Why do we have deposits?

Upon entering the agreement, the purchaser gives the deposit to a real estate agent or lawyer to hold in trust. Deposits made payable directly to the seller should be avoided. Deposits held in trust by a broker or lawyer are protected by an insurance fund.

Where the seller is in default of the agreement or if the contract cannot be completed through no fault of either party, the deposit is usually returned. If the buyer defaults, the deposit is forfeited. In the absence of a deposit, a vendor can sue for damages. This typically involves a long, drawn- out and costly litigation process, and the vendor may never be able to collect.

In Ontario, deposits are released when a sale goes through, when the parties mutually agree, or when a court order directs the release. If parties cannot agree that a deposit can be released, it must remain in a trust account (or be paid into court) until a court order is obtained. Even if no damages are suffered, a deposit is forfeited to the seller if a buyer wrongfully fails to complete a purchase.

The size of a deposit largely depends on where a property is located, the motivation of the parties, and the state of the real estate market. Deposits for residential homes are typically larger in high-demand areas. The consequences if a deposit is too small or too large can be serious. If a purchaser is an assetless entity, the deposit may constitute the only tangible means for the vendor to enforce a transaction or to obtain compensation for damages.

The size of the deposit, how and by whom it is held pending the closing of the transaction, and its role in the event of a default, are all matters that should be considered carefully by lawyers and their purchaser and vendor clients before an agreement of purchase and sale is entered into.

You can read the full article here. 

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