Sunday, 29 April 2012

No Automatic Forfeiture of Deposits Unless They Are "Non-Refundable"

Standard Contracts of Purchase and Sale, developed by BCREA and CBABC and used for the vast majority of residential real estate transactions in BC, include provisions for payments and holding of deposits (section 2) and for forfeiture of deposits "on account of damages" in case of non-completion (section 12).

In a pithy judgment rendered in Tang v. Zhang, 2012 BCSC 213 (originally released in February but republished last week), the court held that, unless a deposit is specifically described as "non-refundable" in the contract, in case of non-completion, it will only be "absolutely forfeited" to the seller "on account of damages".  Accordingly, if the seller suffered no actual damages, the deposit will be refunded to the buyer.  In arriving at this conclusion, the court rejected an argument that two leading BCCA authorities dealing with forfeiture of deposits under standard contracts - Williamson Pacific Developments Inc. v. Johns, Southward, Glazier, Walton and Margetts (1997), 35 B.C.L.R. (3d) 180(C.A.) and Agosti v. Winter, 2009 BCCA 490 - are in conflict with each other or create "a non-refundable deposit scheme that does not require proof of damages."

The facts of the case were simple.  The defendant buyer paid a $100,000 deposit but did not complete the purchase.  The plaintiff seller resold the property at a profit but refused to return the deposit.  The buyer argued that the seller was not entitled to keep deposit (a) because a condition precedent in favour of the buyer was not satisfied or waived, cause the contract to terminate, and (b) because the seller suffered no damages.

Condition Precedent

Under section 3 in the impugned contract, which is the same as in the current standard contract, the parties agreed that the seller would provide a title search and a property disclosure statement:
3.         TERMS AND CONDITIONS: The purchase and sale of the Property includes the following terms and is subject to the following conditions:
The sellers will provide the Title Search and PDCS to the buyer.
Each condition, if so indicated, is for the sole benefit of the party indicated. Unless each condition is waived or declared fulfilled by written notice given by the benefitting party  to the other party on or before the date specified for each condition, this Contract will be terminated thereupon and the Deposit returnable in accordance with the Real Estate Services Act.
Relying on Gulston v. Aldred, 2011 BCCA 147 at para. 36, the court held that the requirement to provide a title search was not a condition precedent because it was not specifically indicated to be "for the sole benefit" of the buyer and, therefore, did not allow the buyer to avoid completion when the sellers did not provide a title search.  The particular language used by the court - "the term is not a condition precedent entitling Mr. Zhang to terminate the contract" - is somewhat unusual as it appears to be inconsistent with the plain language of section 3 and conventional wisdom that contracts are terminated automatically when a condition precedent is not fulfilled or waived, rather than at the option of the contracting parties.

Deposit 

Sections 2 and 12 provided for both, a potential return and forfeiture of the deposit in case of non-completion:
2.  DEPOSIT:  ... 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: ... (c) if the sale does not complete the money should be returned to the party as stakeholder or paid into Court.
12.       TIME: Time will be of the essence hereof, and unless the balance of the cash payment is paid and such formal agreement to pay the balance as may be necessary is entered into on or before the Completion Date, the Seller may, at the Seller’s option, terminate this Contract, and, in such event, the amount paid by the Buyer will be absolutely forfeited to the Seller in accordance with the Real Estate Services Act, on account of damages, without prejudice to the Seller’s other remedies.

The seller argued that Williamson Pacific Developments led to the conclusion that section 12 "creates a non-refundable deposit scheme that does not require proof of damages".  The buyer, however, relied on Agosti, which was decided much recently and also dealt with section 12, to argue that the onus was still on the seller to prove damages in order to keep the deposit.

The court, after considering both cases, found that they were not in fact in conflict, but dealt with two distinct types of deposits and therefore led to opposite but fully reconcilable results:
[34]         The contract in Williamson Pacific Developments expressly indicated the deposit was “non-refundable”.  The court found that the phrase “non-refundable” together with the forfeiture language was enough to show that the deposit was payable to the seller in full without proof of actual damages.  In Williamson Pacific Developments it was agreed damages to the seller resulted from the buyer’s failure to complete the transaction
[35]         In Agosti, there was no additional language that the deposit was “non-refundable”.  Agosti specifies that the phrase “on account of damages” in a deposit clause where the deposit “will be absolutely forfeited to the Seller…on account of damages” means that the seller does not have an unconditional right to the full deposit, but only has a right to claim for proven damages out of the deposit funds.  ...
[36]         In Agosti, the deposit was not said to be non-refundable.  In Williamson Pacific Developments, the deposit was said to be non-refundable.  While the analysis of the respective contracts in Agosti and Williamson Pacific Developments led the court to different results, the reason for the different results appears based on the different wording in both contracts.  The decisions in Agosti and Williamson Pacific Developments can be distinguished by the different wording in the contracts under consideration.
Accordingly, since the deposit in this case was not specifically said to be non-refundable, and the seller admitted that it suffered no actual damages, the court ordered that the deposit be returned to the buyer with interest and costs.