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Nov 2022

Ontario Court of Appeal Weighs in on the Return of a Deposit Under an Agreement of Purchase and Sale

1854329 Ontario Inc. v. Cairo, 2022 ONCA 744 and Relief from Forfeiture

By Brooklyn Lester and Slonee Malhotra

A recent Ontario decision cautions real estate professionals on the importance of due diligence as well as the need to effectively negotiate extensions on behalf of your clients in advance of closing. In 1854329 Ontario Inc. v. Cairo, 2022 ONCA 744, Cairo (“the Buyer”) made an offer to purchase a commercial building from 1854329 Ontario Inc. (“the Seller”). The offer was for $7.25 million. The Buyer paid a $200,000 deposit.

The Agreement of Purchase and Sale contained a financing condition. The Buyer received a term sheet from a lender (“the Lender”). A term sheet outlines the terms of a loan but does not “lock in” the Lender or guarantee that the loan will be advanced. The Buyer waived its financing condition (thereby assuming the risk the financing not coming through) and paid an additional $200,000.00 deposit upon the transaction going firm. After doing this, the Lender changed the terms of the loan such that the Buyer could no longer meet the loan requirements.

The Buyer was unable to complete the transaction under the revised terms and sought a 6-month extension through its lawyer. The extension request was denied. Notably, the motions judge pointed out that the Buyer’s lawyer did not offer any compensation for the extension or attempt to negotiate on the Buyer’s behalf. The Seller, through its lawyer, tendered and ultimately resold the property for $75,000.00 less six months later.

Where a Buyer has failed to fulfill a condition of an agreement, the Buyer may apply to the Courts for “relief from forfeiture”. This legal remedy provides: even if someone has agreed to the terms of a contract, the Court can excuse a party from said penalty. The Buyer applied to the Court for the return of its deposits even though the Buyer failed to complete the transaction. In response, the Seller applied to the Court for “summary judgement”. This means, the Seller applied to dismiss the Buyer’s claim and to hold the deposit as damages for the Seller’s loss.

In general, damages are often the amount that the “harmed” party looses when a transaction fails. In this case, the Seller was able to sell the property to another buyer, for only $75,000.00 less than the $7.25 million the original Buyer agreed to pay. As such, the Buyer argued that the damages to the Seller were limited to $75,000.00 and the Buyer should therefore be entitled to the return of their deposit less $75,000 damages. The Court disagreed; Damages were assessed at $234,849.18. Despite that the damages assessed were lower than the amount of the deposit forfeited, the court ruled that the Seller was entitled to keep the entirety of the $400,000.00 deposit. A deposit is collected as security for performance of a contract and not necessarily as representative of damages in case of a breach of contract. In reaching this decision, the motion’s judge considered that the deposit collected represented about 5.5% of the purchase price and was “commercially reasonable”, there was no inequity in bargaining power or an unfair bargain between the parties and the Seller did not act unreasonably.

The Buyer appealed the decision however on appeal, the court determined that “we see no error in the motion judge’s analysis and conclusion that the appellant has not met the burden of showing that this was an exceptional case where relief from forfeiture should be granted.”

Overall, this case presents a high threshold for relief from forfeiture. Make sure you speak to an experienced lawyer and fully understand the risks of failing to close if you are in a similar situation and the other party does not agree to sign a mutual release. Reach out to one of our qualified real estate lawyers today.