The General Rule: Deposits Are Forfeited
In Ontario, the law heavily favours the seller when a buyer walks away. It is a well-established legal principle that if a purchaser repudiates the agreement and fails to close the transaction, the deposit is forfeited.
Crucially, as affirmed in landmark Ontario Court of Appeal (ONCA) decisions, the seller can retain the deposit even if they suffered no actual financial damage from the failed sale. The deposit is viewed as a guarantee of performance, not merely a pre-payment of damages. If the seller ends up selling the home to someone else for a higher price, the defaulting buyer usually still loses their deposit. Furthermore, if the property sells for less, the seller can sue the original buyer for the difference in value, in addition to keeping the deposit.
The Exception: “Relief from Forfeiture”
While the general rule is strict, buyers can petition the court for an equitable remedy known as “relief from forfeiture” under section 98 of the Courts of Justice Act. To succeed, a buyer must meet a rigorous two-part test established by the ONCA in Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282:
- Disproportionality – the forfeited deposit must be entirely out of proportion to the damages actually suffered by the seller.
- Unconscionability – it must be shown to be unconscionable for the seller to retain the money.
Recent Court Perspectives
Recent rulings from the Ontario Court of Appeal remind us that the courts will look at the full commercial context when determining unconscionability.
Judges examine the sophistication of both parties, whether there was an inequality in bargaining power, and the conduct of the seller – including whether the seller acted reasonably and in good faith. A large deposit amount (for example, 20% of the purchase price) is not automatically unconscionable on its own; it requires exceptional circumstances, such as vendor misconduct or misappropriated funds, for a court to step in and return the money to a breaching buyer.
Protect Your Real Estate Investment
Whether you are a seller seeking to retain a deposit and sue for damages after a buyer defaults, or a buyer seeking relief from an unconscionable forfeiture, you need experienced litigation counsel. These disputes are ultimately resolved through motions and, where necessary, trial – and how the matter is argued from the outset can shape the outcome.
With 17+ years of legal experience, Hashmi Law Group provides strategic representation for real estate disputes, delayed closings, and breach of contract litigation across Mississauga, Toronto, North York, and the Greater Toronto Area.
Contact us today to schedule your in-person or virtual consultation. Call 905-503-1486 or 647-772-8187.
Disclaimer: This article is not intended to provide legal advice. Before taking any legal step, you should consult with a lawyer in Ontario.
