Holiday Closure

The OREA office will close for the holidays at 12 p.m. Tuesday, December 24th.  Normal business hours will resume on Thursday, January 2nd.  Happy Holidays!

Holiday Closure

The OREA office will close for the holidays at 12 p.m. Tuesday, December 24th.  Normal business hours will resume on Thursday, January 2nd.  Happy Holidays!

April 1st - 2011

Show me the money: The fate of the deposit if the deal falls through

You’ve worked hard to seal the deal and to get the buyer and seller to come to an agreement. But what happens to the deposit if the deal fails to close?

You’ve worked hard to seal the deal and to get the buyer and seller to come to an agreement. But what happens to the deposit if the deal fails to close?

If a brokerage is named as the deposit holder in the Agreement of Purchase and Sale (APS), the deposit monies are placed in the brokerage’s real estate trust account. That money can only be released in accordance with the Real Estate Business and Brokers Act (REBBA 2002) and its regulations. The phrase “to be held in trust” in the APS means the deposit is to be held in trust according to the terms of the trust.

The deposit is to be paid to the party that is entitled to it, according to the terms of the trust. However, a transaction can fail to close for a number of reasons, and there are often disputes as to who is entitled to the deposit in those circumstances. Every unique situation can entail a different set of legal issues and responsibilities.

Consequently, brokerages should only pay out deposit monies that are being held in trust either in accordance with a mutual release (such as OREA Standard Form 122 – Mutual Release) or direction signed by all parties, or as directed by a court order. If any conflict arises over who is entitled to deposit monies, all parties -- including REALTORS® -- should seek legal counsel.

Neither brokerages nor REALTORS® can make the decision about who is entitled to the deposit when a transaction fails or if there is a dispute between the parties as to who is entitled to it. The transaction’s success may hinge on a number of conditions, such as: financing, home inspections, or the sale of a buyer’s current home. In some cases, a buyer may not have used reasonable efforts to satisfy a condition in the agreement. In others, the seller may be in breach of one of their obligations under the APS. There could be legal consequences if the seller has resold the property if an obligation to fulfill the original APS still exists. These are legal matters that can only be determined with legal advice.

Even then, the disagreement between the parties may need to be resolved in court. If the parties to the agreement become involved in a court action, it may be possible to arrange to have the deposit money that is being held in trust paid into court. A lawyer’s advice would be a good idea for any of these situations. According to the Registrar’s Bulletin, Failed Agreements of Purchase and Sale – Return of Deposits, brokerages – as trustees of a consumer’s money – have important responsibilities, including a legal duty to observe a high standard of care and to act impartially when dealing with potential beneficiaries of a trust.

Despite what a condition clause may say about the return of the deposit if a condition is not met or waived and the transaction does not go forward – without the mutual release of the parties regarding the monies held in trust by the brokerage – it may still take time to have the deposit monies properly disbursed. It may even require litigation between the parties.

In interpreting these clauses, the courts have imposed an obligation on parties to use reasonable efforts to satisfy their obligations in good faith. As a result, brokerages or REALTORS® may be caught in the middle. If brokerages do pay money out without a signed release or a court order, they could be liable for the amount involved if it is paid to the wrong party, as well as being in breach of REBBA 2002 requirements. For these reasons, such wording in a condition clause does not replace a signed mutual release in giving the brokerage the authority to release the deposit monies.

OREA Standard Form 122 – Mutual Release, provides that all parties to the agreement acknowledge the termination of the transaction and the release of all parties and the brokerage from any rights and obligations arising from the agreement. The form further directs that the deposit be disbursed to the party or parties specified in the form.

A deposit received by the brokerage named as the deposit holder in the APS must be put into that brokerage’s real estate trust account within five business days of receipt, under section 17(1) of Regulation 567/05 (GEN). According to section 17(2), “business day” means a day that is neither a Saturday nor a holiday within the meaning of subsection 29 (1) of the Interpretation Act. That includes Sundays and most statutory holidays.

Deposit monies can only be paid out of the statutory trust account “in accordance with the terms of the trust,” according to section 27 (1) of REBBA 2002. Breach of trust could result in offences under REBBA 2002 and the Criminal Code of Canada and may create a civil cause of action against the trustee, i.e. the brokerage.

There are procedures to deal with monies held in trust that are either unclaimed or where the entitlement is undetermined. These can be found in subsections 27(4) to (14) of REBBA 2002. For instance, section 27(4) provides that if a brokerage holds money in trust for a period of two years and entitlement to the money has not been determined or is unclear, the brokerage shall pay the money to the administrative authority (i.e. RECO); or if there is no designated administrative authority, the Minister of Finance. Section 27(7) requires the brokerage to provide the administrative authority with as much information as it has, in order to determine who is entitled to the trust money.

For more information, see “Ask the Registrar – Dealing with unclaimed money in a real estate trust account” in For the RECOrd, Fall 2010, on the RECO website at www.reco.on.ca under Publications and Resources – Newsletter.

More information on deposits and terminated transactions is available in the OREApedia section of the OREA website under Real Estate Trust Account and under Offers/APS – Deposits. You can also check out the Registrar's Bulletin website (Publications and Resources -- Registrar's Bulletins & Guidelines) at www.reco.on.ca.

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Senior Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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