Your Real Estate Deposit held ‘In Trust’

Your Real Estate Deposit held ‘In Trust’

Your Real Estate Deposit held ‘In Trust’.

We recently had a client enter into a Contract of Purchase and Sale, with the standard subject clauses. The purchase price was $450,000, our the buyers were considered first-time buyers, hoping for 95% financing. The initial deposit was $10,000, to be increased after subject removal. The deposit was held by the real estate company in trust as a stakeholder.

The Buyer was unable to remove subjects, despite an extremely aggressive Mortgage Broker working the file through all three insurer’s systems. The deal collapsed and the Buyer requested the real estate company to return the initial deposit. As the Real Estate company was bound by the stakeholder provisions, they requested the Seller for permission to release, which the Seller withheld.

I asked my favourite lawyer, Tony Spagnuolo of Spagnuolo and Company, if the Seller was within its rights to withhold permission, and how the Buyer could recover its Deposit.

“Good news and bad news” replied Mr. Spagnuolo.

The good news is that the Seller is not entitled to any portion of the deposit, so long as the Buyer acted reasonably in not removing its subjects, (which in this case the Buyer clearly did). The Seller may not legally retain the Deposit or any portion, nor should the Seller prevent the Real Estate company from releasing the Deposit.

The bad news is that to force the Seller to release the Deposit, the Buyer must start an action and ask the Court for an order releasing the Deposit, which means costs to the Buyer.  There is little doubt that the Buyer would obtain an order in their favour.  However this usually requires legal counsel, and thus requires money and time.  It is likely the Seller will be forced to pay for a portion of the Buyer’s legal costs, but not all.  The end result will be the Buyer will still be out of pocket.  No doubt the Seller was aware of this and was likely trying to negotiate for a portion of the Deposit to be retained by him or her.  An unpleasant leveraging of our overtaxed court system.

I asked Mr. Spagnuolo what can be done about this for future clients, and his response was very little, apart from trying to make the initial deposit as low as possible (at least if you are concerned about the Buyer). If the above deposit was, for example, $1,000, the client would have $9,000 in their pocket, and would only have to argue about $1,000.

It is important to note that the Real Estate company is bound to hold the deposit until there is a mutual release signed off by the vendor.  When holding a deposit as a stakeholder, the deposit cannot be released to either party without the consent of both parties.  If either side refuses to provide that consent, the other party will be forced to commence a BC Supreme Court action to have the deposit “absolutely forfeited” to the seller, at which time the brokerage may pay the deposit into Court.

How did this play out in the end?

The Real Estate company terminated the listing with the Seller, as clearly the Seller is likely to be problematic in future dealings.  The Sellers leveraged a $750.00 sum from the Buyer.  One might say ‘blackmailed’ rather than leveraged mind you.

The Buyers are recovering from the experience, and will likely take their time re-entering another offer as the sting of the process and the $750.00 taken from them will not wear off quickly.

Thank you

Dustan Woodhouse & Tony Spagnuolo

 

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