A five-member division of the British Columbia Court of Appeal (the Court) has reversed one of its own recent decisions to hold that where a buyer fails to complete a real estate purchase, the deposit will be forfeited even if the vendor suffers no loss on the sale. The case re-establishes the common law that a deposit on a real estate sale will ordinarily be forfeit when a purchaser fails to complete, and serves to clarify parties' expectations for real estate transactions in B.C.

Background

In Tang v. Zhang, the sellers entered into a standard form real estate contract to sell a residential property for C$2,030,000. The buyer paid a deposit of C$100,000, but failed to complete. The sellers took the position that the deposit was absolutely forfeited to them, and commenced a lawsuit. During the course of the litigation, the sellers sold the property to a third party for a higher price. As a result, they did not suffer any pecuniary damages on the transaction.

The sales contract stated that "[t]ime will be of the essence hereof, and unless the balance of the cash payment is paid ... on or before the Completion Date, the Seller may ... terminate this Contract, and, in such event, the amount paid by the Buyer will be absolutely forfeited to the Seller... on account of damages". [our emphasis].

The trial judge was presented with two apparently contradictory authorities of the Court.

In Williamson Pacific Developments (1997), the sales contract stated that the deposit was "nonrefundable" and that if the vendor terminated the contract due to the purchaser's failure to pay the balance, the deposit would "be absolutely forfeited … on account of damages". Following the general rule that a deposit is a guarantee of completion, and that a deposit is ordinarily forfeited where the purchaser fails to close the sale, the Court affirmed that the vendor was entitled to the deposit, regardless of damages.

In Agosti v. Winter (2009), the Court came to the opposite result. In that case, the purchaser failed to pay a deposit of C$10,000 upon subject removal. Instead, she sought an amendment to allow her to pay the deposit in two instalments. The vendors did not accept and eventually learned that the purchaser would not be completing the transaction. The vendors sold for C$5,000 less than the original price and sued the purchaser for the unpaid deposit and general damages. Unlike Williamson, the contract did not state that the deposit was "nonrefundable".

The Court in Agosti did not accept that the vendors had an unconditional right to the deposit. Instead, the court held that the deposit was not non-refundable and was not automatically forfeited to the sellers when the contract was repudiated by the purchaser. As a result, if the vendors proven damages were less than the amount of the deposit, they would not be entitled to the excess.

The contract language in Tang v. Zhang was substantially the same as in Agosti and the sales contract did not state that the deposit was non-refundable. Accordingly, the trial judge applied Agosti and held that the buyer was entitled to the return of the deposit.

Appeal Decision

On appeal, the Court sat in a five-member division because it was being asked to reconsider its decision in Agosti. The appellant sellers took the position that the deposit was absolutely forfeited without proof of damages. The respondent buyer argued that the language "on account of damages" that was found in the sales contract was an express term that limited the forfeiture of the deposit.

The Court surveyed the historic use of deposits on real estate transactions and noted that a deposit was a "guarantee that the contract would be performed". In that light, the Court interpreted the "on account of damages" language to mean that a vendor is prevented from double recovery against a defaulting purchaser for breach contract. In other words, if damages are proven, the vendor is not entitled to the amount of the deposit plus the vendor's proven damages. Rather, unless the contract expresses otherwise, the vendor's damages will be the greater of the deposit or the vendor's proven damages.

The Court cautioned that the question of whether a deposit is forfeited remains a matter of contractual interpretation. That notwithstanding, the court noted that deposits will generally be forfeited by a purchaser who repudiates a contract.

The Court allowed the appeal and concluded its reasons by expressly overruling Agosti.

Conclusion

The state of the law following Agosti was uncertain – a vendor to a real estate transaction may not have been entitled to a deposit unless it suffered damages equal to or more than the deposit, notwithstanding a purchaser's breach. Tang v. Zhang serves to re-establish predictability for real estate transactions that fail due to a default of the purchaser, and provides reasonable guidance to parties going forward.