Has a REALTOR® ever told you that a deposit binds a buyer to a real estate agreement of purchase and sale (APS) or that a buyer who doesn’t provide the deposit can walk away?
Naughty! Naughty! REALTOR®!
I’ve come across those claims on occasion most recently in a blog written by a peer who correctly noted that consideration is essential in a real estate contract yet made numerous factually incorrect statements concerning deposits which include: defining a deposit to mean consideration; that it binds the buyer to the contract with the seller and, by not submitting the agreed to deposit, the buyer can "walk away."
Unfortunately, the buyer or seller relying on those interpretations places themself in jeopardy.
In simple terms, consideration means the exchange of one thing for another. In order for a real estate contract to be binding there must be an exchange which usually means the property is exchanged for money. However, another form of consideration known as a seal traces its roots to the feudal times when kings imprinted their ring’s insignia into red wax poured onto a document. It survives to this day as the highest oath one can make in a business arrangement because it cannot be withdrawn by the person making the promise and the courts recognize it as having a statute of limitations life longer than any other such promise.
Additionally, as deposits are not the consideration, they’re not mandatory and serve to add strength to the buyer’s offer.
The Agreement of Purchase and Sale used by REALTORS® incorporates the seal which is the black splotch found beside the signature lines. Bearing in mind that consideration is an exchange of one thing for another, simply signing one’s name under seal on a blank piece of paper would not be consideration because nothing is being exchanged so, an APS under seal is the buyer’s and seller’s oath to each other that they will fulfill all of the terms and conditions within the APS.
The terms of course include the seller’s major slice of consideration - parting with the property on an agreed upon date, while the buyer’s slice is pretty much the money due the seller for the property on the agreed exchange date and where a pre-paid portion called the deposit is to be delivered up front by the buyer and held in trust until closing day.
Hence the deposit is not the consideration and contrary to the belief of some of my peers, the buyer’s failure to put up the deposit does not allow them to "walk away" as suggested in that blog.
Despite the author's choice of words which implies that the buyer can turn their back without recourse, he curiously and correctly cautions that to do so leaves the buyer open to litigation. Bluntly put, a buyer who does not provide the deposit breaches the contract which then allows to seller the option of having it declared void either by mutual agreement with the buyer or by court direction. The seller may also sue for damages if not the less likely, specific performance. Conversely, if a seller assumes the contract is void because he hasn’t received the deposit then resells the property without having the contract properly declared void, he can be sued by the buyer for non-performance.
Such law suits are documented on canlii.
A REALTOR’s® core strength and value is the knowledge we bring to the table in order to protect our clients’ best interests. Understanding deposits is real estate 101. It wouldn’t be fair of me as a REALTOR® to ask you to believe me over other REALTORS® without at least providing a higher authority: this piece written by real estate lawyer, Mark Weisleder, explains the significance of deposits and the implications to both buyer and seller when it is withheld.
A great question to ask when intervieing REALTORS® is: if the buyer fails to deliver the deposit, is the Agreement of Purchase and sale Void? If they answer in the affirmative keep interviewing.
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