Deposits for purchase, or “earnest money” is an old, old concept. In ancient Greek society, the word “Arrabon” was used for a sum of money or valuable goods held as security against the completion of the larger and final transaction. In modern Greek, the word Arrabona refers to an engagement ring! More interesting perhaps, the concept of earnest money may even go back further, several thousand years before ancient Greek where middle eastern peoples, who only typically had one pair of sandals, would give one of their sandals as a guarantee of the final transaction as they got together the necessary money or goods to complete the transaction. The idea was that they couldn’t walk comfortably until they completed the deal they made. History lesson aside, this should help us in thinking through the modern-day use of the real estate deposit.
A common misconception of many folks regarding the real estate deposit is that it is the consideration of the contract. Consideration is one of the requirements of a legal contract under the law which basically means “In consideration of a bundle of goods provided by party A, party B will give value in exchange”. Without legal consideration, a contract is not enforceable, which has many diverse consequences when the deposit is believed to be the consideration. To be clear, in real estate contracts the consideration is the money or other value paid to the seller by the buyer in exchange for the transfer of the title for that property. Many who mistakenly believe the deposit to be the consideration of the contract, also mistakenly believe that the failure of the buyer to deliver that deposit money after signing a contract has not ratified that contract and are free to walk away. FALSE! Once the contract is signed and communicated between the parties they have legal obligations to each other, either to fulfill their conditions or in the case of unconditional offers to close on the property whether or not the deposit is ever received.
Trust and Trustees
The modern real estate transaction is complex and dynamic unlike days of the past, and one of the ways the contract maintains fairness regarding the deposit money is to use a trustee agreed upon by the parties, who is obligated by law to follow the terms of trust outlined in the agreement itself. In most transactions conducted through a REALTOR®, it is common that one of the real estate brokerages is named as the trustee of the deposit money, and the broker of that brokerage is the effective trustee who must follow the terms of trust exactly as agreed by the parties in the contract. This means that the trustee must set aside all personal interests, and interests of their client in managing the deposit money mechanically using the terms of trust in the strictest sense. To do otherwise would place the broker and the brokerage in violation of Alberta law and liable for damages suffered by any party who was harmed by their negligence in fulfilling the terms of trust exactly as agreed.
Refunded to the Buyer
In a typical transaction, a buyer gives deposit money to the trustee at an early stage of the signed agreement. Although not required by law to make a transaction binding, the seller will normally not accept an agreement that doesn’t anticipate some level of deposit as security that the buyer will complete the transaction. To instruct the trustee, the buyer and seller agree in the standard AREA purchase contract that the deposit will be refunded to the buyer, without prior notice, if one of four specific scenarios happen during the transaction. First, if the buyer has conditions in the agreement and they choose not to waive or satisfy those conditions, the deposit is refunded to the buyer. This stands as a protection for the buyer’s money where the seller has agreed to conditions for the sole benefit of the buyer. Second, if the seller is not able to produce confirmation that a non-owner spouse is willing to allow the trade, the buyer has a way out by voiding the contract after the date specified in the Dower section. If the buyer does exercise this option because they do not feel confident the seller is able to complete it, the deposit goes back to the buyer. Third, in situations where the buyer fails to pay an additional deposit anticipated in the contract and the seller chooses to exercise their void option, all previous deposits are paid to the buyer because the seller ended the contract at their will. Fourth and finally, if the seller fails to perform the contract the deposits are to be restored to the buyer because the seller did not fulfill their end of the agreement. These four scenarios are plain and clear moments that the trustee need not hesitate to refund the deposit money to the buyer.
Paid to the Seller
The deposit money paid by the buyer will form part of the purchase price and ultimately be paid to the seller in the successful completion of the contract, however, the AREA standard purchase contract only anticipates one scenario where the seller keeps the deposits apart from a separate completion of the agreement. If the buyer, who signs the agreement and subsequently waives or satisfies all of their conditions, is unable or unwilling to complete the contract the deposit money is paid to the seller. This is only the first of many remedies available to the seller in such a situation, but the knowledge of this clause should prompt the seller to seek significant deposits, and the buyer to understand the gravity of the situation where they do not complete the contract once it is unconditional. It is not uncommon for the seller to use the forfeited deposit money to retain legal counsel and pursue the buyer in default for additional damages and costs allowed for in the contract.
In recent years I have noticed a decrease in the value of deposits to the great detriment of the industry in general, but the gravity of respect for the contract made specifically. A clear understanding of the terms of trust and the process for managing deposit money should give confidence to REALTORS® and clients alike in supplying the deposit for purchase.
Provincial Practice Advisor
Bryan has many years of experience in the real estate industry including over 10 years as a former broker in the Edmonton Region.
Email: email@example.comPhone: 403-209-3619