Deposits are an essential term of Agreements of Purchase and Sale. They demonstrate the Buyer’s commitment to complete the transaction and act as a form of security for the Seller in the event the transaction fails to close. It is important, however, that Buyers and Sellers have at least a basic understanding of deposits and how they operate in the context of an Agreement of Purchase and Sale, including the following:
1. Buyer’s Perspective: Deposits not only demonstrate the Buyer’s commitment to purchasing a property, but also demonstrate their financial means to complete the transaction. On closing, the purchase price is adjusted and the Buyer receives a credit in the amount of the deposit.
2. Seller’s Perspective: Deposits act as reassurance that the Buyer is acting in good faith and that they are committed to completing the transaction. More importantly, they act as a form of security in the event the transaction does not close due to the default of the Buyer.
3. Amount of the Deposit: In theory, a deposit should be large enough to compensate the Seller in the event the transaction fails to close. In reality, each geographic area has its own customs with respect to the amount of the deposit. For example, in Toronto,
the amount is approximately 5 percent, though this will vary significantly in a pre-construction scenario when a purchaser buys a home from a developer in advance of construction. In a resale scenario, deposits can also be used strategically, especially in multiple offer situations. A high deposit may motivate a Seller to select one o er over another as it provides the Seller with a sense of security that the prospective Buyer will complete the transaction; however, this may only be relevant if the competing offers have identical purchase prices.
4. Timing of Payment: Deposits are ordinarily made with the o er or within 24-48 hours a er acceptance of the o er. In a pre-construction scenario, there may be multiple deposits paid over several months. If there is a binding Agreement of Purchase and Sale, a Buyer cannot get out of the transaction by failing to pay the agreed upon deposit. Such conduct constitutes a breach of the agreement.
5. Holder of the Deposit: Generally, deposits are held by the brokerage or lawyer representing the Seller and held in trust. The Seller’s brokerage and lawyer are under a duty to protect the Buyer’s trust funds. Buyers should avoid paying the deposit directly to the Seller.
6. Disputes: Buyers and Sellers may be surprised to discover how di cult it can be to have the deposit released from the brokerage or lawyer’s trust account, as the brokerage or lawyer will require either: (a) a written agreement between the parties, such as a mutual release; or (b) a court order.
It is also important to keep in mind that each and every transaction is different and the circumstances of the transaction may call for a different approach. Before submitting or accepting an Agreement of Purchase and Sale it is important to consult with your realtor and lawyer to ensure that the deposit terms are properly structured to protect your interests.