The B.C. Court of Appeal recently resolved a conflict between two of its previous decisions, clarifying the effect of a standard provision in real estate contracts that many of the Province’s real estate professionals may take for granted. The issue is whether a seller has the right to keep a deposit even if it suffers no damage as a result of a purchaser’s failure to complete, and the Court of Appeal’s recent uncertainty on this issue has caused confusion about many of the standard form real estate contracts currently in use in the Province.
In the most recent decision, Tang v. Zhang, 2013, BCCA 52, the court was asked whether the Greater Vancouver Real Estate Board’s standard form Contract of Purchase and Sale gives a seller the unconditional right to keep a deposit when a buyer’s breach of contract has not caused the seller to suffer clear monetary losses. Specifically at issue was the “time of the essence” clause, which states that if the buyer fails to complete the purchase, the seller can terminate the contract, and the amount paid by the buyer as a deposit “will be absolutely forfeited to the seller… on account of damages, without prejudice to the seller’s other remedies.”
Importantly, when the buyer in Tang failed to complete the purchase, the seller put the disputed property back on the market and managed to sell it to a third party for a higher price. In the meantime, the seller commenced its action in B.C. Supreme Court, seeking a declaration that the deposit became “absolutely forfeited” following the buyer’s failure to complete, and an order that the deposit be released by the agent holding it. Following a previous decision of the B.C. Court of Appeal, Agnosti v. Winter, 2009 BCCA 490, the trial judge held that the deposit provision did not give the seller an unconditional right to the full deposit, but instead created the right to claim for proven damages out of the deposit funds. Since the sellers did not suffer clear monetary losses, the trial judge held that the buyer was entitled to the return of the deposit.
The Court of Appeal reversed that decision, and found that in the absence of a clear intention to the contrary, deposit payments are held as a guarantee of a purchaser’s performance and cannot be recovered by that same purchaser following his or her breach of contract. Holding that Agnosti was wrongly decided and should no longer be followed, the court noted that contractual provisions that state a deposit will be forfeited “on account of damages” do not change the traditional nature of deposits as a guarantee of performance, but instead mean that if damages can be proven, the deposit will be applied against them. However, barring a clear intention to the contrary, if damages cannot be proven, the deposit will still be forfeited to the seller if the buyer fails to complete the purchase.
Considering the importance of deposit provisions in real estate contracts, the mixed messages sent by the Bench on this issue in recent years have raised concerns about contracts currently in use in the Province. With the Court of Appeal finally resolving the conflict between its previous decisions, real estate professionals should consider having their standard form contracts reviewed by legal counsel to ensure that the deposit provisions they contain will achieve their intended objectives.
If you have any questions concerning this bulletin, please contact the Davis LLP Real Estate Law Practice Group.