When a real estate transaction fails in Ontario or Alberta, one of the most pressing questions is: "What happens to my deposit?"
The answer depends entirely on why the deal fell through and the terms of your Agreement of Purchase and Sale. Your real estate lawyer plays a crucial role in protecting or recovering your deposit.
How Real Estate Deposits Work
When you make an offer on property in Ontario or Alberta, you typically provide a deposit (usually 5% of the purchase price) held in trust by the listing brokerage or the seller's real estate lawyer. This deposit demonstrates your serious intent and provides the seller with some protection if you breach the contract.
You Back Out During the Conditional Period
You Get Your Full Deposit Back
If conditions in your Agreement of Purchase and Sale are not satisfied during the conditional period, you can exit the transaction and receive your complete deposit back. Common conditions include:
- Financing approval
- Satisfactory home inspection
- Sale of your current property`
- Review of condominium status certificate
In most cirmustances, your real estate agent or your real estate lawyer ensures you properly document the failed condition(s) and request the deposit release in writing. The deposit holder must return your funds, typically within 24-48 hours of receiving proper notice.
You Back Out After Removing Conditions
You Likely Forfeit Your Deposit
Once you waive all conditions and the contract becomes firm, backing out without legal justification usually results in deposit forfeiture. The seller keeps your deposit as partial compensation for damages.
However, the seller can also sue for additional damages if:
- They resell the property for less than your agreed price
- They incur carrying costs during the re-listing period
- They face other losses directly caused by your breach
Your real estate lawyer can assess whether fighting the deposit forfeiture is worthwhile based on the specific circumstances.
The Seller Breaches the Contract
You Get Your Deposit Back Plus Potential Damages
Say the seller of your property decided to back out and not sell you the property. When sellers fail to complete the transaction without legal justification, you're entitled to:
- Full return of your deposit
- Reimbursement for reasonable expenses (inspection fees, appraisal costs, moving expenses)
- Potential damages for losses incurred
Common seller breaches include:
- Refusing to close despite having no legal grounds
- Unable to deliver clear title
- Failing to vacate the property
- Not completing agreed-upon repairs
In most cases, your real estate lawyer sends formal demand letters, negotiates settlement, and if necessary, will refer you to a real estate litigator who initiates legal action to recover your deposit and damages.
Mutual Agreement to Cancel
Deposit Return Is Negotiated
Sometimes both parties agree the transaction shouldn't proceed. You might come across a term called mutual release. This is when both parties amicably agree to void the deal, or parts of it. In this case, the deposit return becomes a negotiation point:
Full Return to Buyer: When circumstances beyond both parties' control prevent closing (such as property destruction), buyers typically receive full deposit returns.
Partial Return: Parties might split the deposit if both contributed to the transaction failure.
Seller Keeps Deposit: If the seller made substantial preparations or incurred costs based on the buyer's commitment, they might retain some or all of the deposit.
Your real estate lawyer negotiates these terms and documents any mutual release in writing to protect you from future claims.
Title Issues Discovered
You Get Your Deposit Back
If your real estate lawyer's title search reveals problems the seller cannot resolve, such as unregistered liens, boundary disputes, or ownership claims, in some cases you can cancel the transaction and recover your full deposit. The seller's inability to deliver clear, marketable title breaches a fundamental obligation. Since title issues can be unique, your Real Estate Lawyer will have to guide you through what happens next.
Financing Truly Falls Through
You Get Your Deposit Back Only If You Had a Financing Condition
If you included a financing condition and genuinely cannot obtain mortgage approval despite reasonable efforts, you can cancel and recover your deposit. However, your real estate lawyer will advise you that:
- You must make legitimate financing efforts
- You cannot use failed financing as a convenient exit strategy
- Lenders may investigate whether you deliberately sabotaged your approval
Without a financing condition, inability to secure financing does not entitle you to deposit return.
Deposits Are Held "In Trust"
In both Ontario and Alberta, deposits are held in trust accounts by real estate brokerages or lawyers. The deposit holder cannot release funds without:
- Written agreement from both parties, or
- A court order directing release
If parties dispute who gets the deposit, the holder must either:
- Wait for mutual written authorization
- Pay the deposit into court and let a judge decide
- Continue holding it indefinitely (uncommon)
Your real estate lawyer can petition the court for deposit release if the seller unreasonably refuses to authorize return of your deposit when you have clear legal entitlement.
How to Protect Your Real Estate Deposit
Work with your real estate lawyer to:
Include Robust Conditions: Don't waive protections prematurely.
Document Everything: Keep records of all communications, efforts to satisfy conditions, and any issues that arise.
Act Promptly: Contact your real estate lawyer immediately when problems emerge.
Get Written Agreements: Any deposit release or retention should be documented in writing signed by both parties.
Don't Sign Mutual Releases Hastily: Have your lawyer review any proposed release before signing.
our deposit return depends on why the transaction failed. You typically recover deposits when conditions aren't satisfied, when sellers breach the contract, or when title issues emerge. You forfeit deposits when you back out of firm contracts without justification. A real estate lawyer in Ontario or Alberta protects your deposit rights and recovers funds when you're legally entitled.
Related Resources
- What is a Mutual Release? - Understanding how mutual releases work to cancel agreements
- My Buyer Won't Close. Now What Do I Do? - Seller perspective on failed transactions and deposit disputes
- Understanding Deposit Deadlines in Ontario Real Estate Transactions - Critical timelines for deposit submission
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