Deposits in Purchase Offers - How is this money handled?

Deposits are a common part, and have a significant impact, on almost every real estate transaction. The Supreme Court of Canada has described the deposit in a real estate transaction as, compensation to the seller for the lost opportunity to bargain with other buyers (for the property being taken off the market), and for any resulting loss of bargaining power, as the price at which the seller is willing to sell has been disclosed. In many cases, a deposit helps solidify the buyer’s commitment to the property.

In a typical real estate transaction, the buyer's Realtor will deliver the required deposit to his or her brokerage. The deposit clause in the purchase agreement will specify when the deposit must be paid, usually upon the removal of subject clauses.

Section 28 of the Real Estate Services Act requires that money held by a brokerage in respect of a real estate transaction be held by the brokerage as a stakeholder. The money is held for the real estate transaction and not on behalf of one of the parties. If a party does not remove a subject clause, the brokerage requires the written agreement of both parties in order to release the deposit. If both parties do not sign the agreement to release the deposit, then the parties will have to apply to court for a determination of the deposit issue. Therefore, if both parties to a contract for a trade in real estate do not consent, in writing, to the release of the deposit, the brokerage cannot release the deposit to either party. However, the brokerage may pay the deposit into court, or the brokerage may release the deposit as directed by a court order. 

A certain degree of written consent is generally included in the standard Contract of Purchase & Sale which both the Buyer & Seller sign at the time of an accepted offer. This generally includes the following paragraph:

"In the event the Buyer fails to pay the Deposit as required by this Contract, the Seller may, at the Seller’s option, terminate this Contract. The party who receives the Deposit is authorized to pay all or any portion of the Deposit to the Buyer’s or Seller’s conveyancer (the “Conveyancer”) without further written direction of the Buyer or Seller, provided that: (a) the Conveyancer is a Lawyer or Notary; (b) such money is to be held in trust by the Conveyancer as stakeholder pursuant to the provisions of the Real Estate Services Act pending the completion of the transaction and not on behalf of any of the principals to the transaction; and (c) if the sale does not complete, the money should be returned to such party as stakeholder or paid into Court."