Tang v. Zhang (2013 BCCA 52) – Bridging the Gap on the Forfeiture of Deposits in Real Estate Sales

In early February, the BC Court of Appeal re-examined the approach taken by courts in interpreting deposit clauses in real estate contracts in British Columbia. As Madam Justice Newbury framed the issue: where a buyer fails to complete a purchase as required (thus effectively repudiating the contract), and has paid a “deposit” that the contract states is to be forfeited to the seller “on account of damages”, must damages be proven in order for the seller to retain the deposit? 

Previous BC Court of Appeal decisions on this issue have led to mixed results, but two distinctly opposite trends emerged.

The first interpretation, from Williamson Pacific Developments Inc. v. Johns, Southward, Glazier, Walton and Margetts (1997) 35 BCLR (3d) 180, views “deposits” in their traditional sense as “earnest money for the performance of the contract”. In an agreement with the words “forfeited to the seller on account of damages”, the contract cannot be interpreted in a way that allows the deposit to be returned to the buyer if the seller did not actually suffer damages. In other words, which most of us are familiar with, if the buyer breaches the contract, the deposit is surrendered to seller and non-refundable, regardless of whether actual losses were incurred.

The second interpretation, from Agosti v. Winter, 2009 BCCA 490, takes a much more lenient approach. Unlike Williamson, where a deposit is absolutely lost in the event of a breach by the purchaser, the Agnosti approach only entitles the seller to that portion of the deposit which covers damages caused by the breach. For example, if a purchaser pays a $10,000 deposit but fails to close on a $1,000,000 home, and the seller is then forced to sell the home to another person at $995,000, the seller is entitled to $5,000 from the deposit.

In Tang v. Zhang, the BC Court of Appeal bridges the gap between these two opposing approaches. Madam Justice Newbury first approached the concept and definition of “deposits” in the same strict manner as Williamson, and the long-standing common law in Canada and the United Kingdom which supported that decision. Deposits, she concludes firmly, are earnest money for the performance of a contract.

However, acknowledging that such a firm approach would lead to undesirable practical consequences, the Court established a safety net: deposits will only be forfeited if it is reasonable to do so. The scope of “reasonableness” is unclear, but seems to be in the window of 10% to 20% of the purchase price (based on common law in BC and specific sections of the Real Estate Marketing Act). If the amount of the deposit is greater than that, it risks being deemed penal or unconscionable – which could then lead to different remedies for the purchaser in common law or in equity.

As for the clause “forfeited to the seller on account of damages”, the Court held that the true nature of the deposit prevails: the deposit is forfeitable, regardless of whether or not there are damages – and whether or not the deposit is applied (or “on account of”) those damages. The court is careful to note, however, that this is subject to any clauses in the agreement specifying otherwise. So potential buyers and sellers: make sure that you pay close attention to how your deposit will be used in your next deal.

 

Written by Boughton Law’s former Associate Hannah McDonald and former Articling Student Alex Blondin

 

Tags: Article; Real Estate

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