Forfeiture of Deposits in Real Estate Contracts

When a real estate contract fails to complete, questions can arise in relation to who is entitled to the initial deposit. Standard form real estate contracts often state that if a buyer fails to complete, the deposit is forfeited to the seller “on account of damages.” However, in a rising real estate market, sometimes the seller subsequently disposes of the property for more than the original purchase price and essentially suffers no “damages”.  In those cases who is entitled to the deposit?  In Tang v. Zang, 2013 BCCA 52, the British Columbia Court of Appeal has provided some welcome insight and clarification into deposit provisions contained in standard real estate contracts of purchase and sale.

In Tang v. Zang, the buyer failed to complete the real estate contract and the seller sought a declaration that the deposit became “absolutely forfeited” following the buyer’s breach. The buyer argued that the deposit should be returned on the basis that the seller had sold the subject property for more than the contract price and suffered no damages.

After considering the history of deposits and previous judicial decisions, the court stated that the real purpose of the deposit was to motivate parties to carry out their contractual bargains. Therefore, generally, a deposit is forfeited by a buyer who repudiates the contract and is not dependent on proof of damages. The court went on to say that the term “on account of damages” does not alter the true nature of the deposit, but rather means that a deposit will be applied on account of any damages a seller may suffer due to the buyer’s breach of the contract.

This case clearly provides that even in the event there are no damages sustained due to a breach of a contract, as in Tang, the deposit will still be forfeitable.

For full case report, see: Tang v. Zang, 2013 BCCA 52