By Vito Campanale

Currently most conditional offers are written such that if the condition is not met, the offer becomes null and void and the buyer’s deposit shall be returned to the buyer in full, without interest or deduction. But what happens when the seller, after they have been properly informed in writing by the buyer that a condition has not been met, refuses to release the deposit?



In Ontario if the buyer and seller don’t come to an agreement within two years, the deposit holder, usually the listing brokerage, must forward the deposit in question to the Real Estate Council of Ontario (RECO) along with copies of the file, in the event the matter is resolved sometime after the two-year period. The seller, since they have been notified that the condition in the agreement has not been met, is therefore free to continue to market their property for sale. However, where does that leave the buyer? How often does the buying Realtor explain to the buyer when the offer is being prepared that in the event the condition is not met, the release of the deposit is not automatic and that the seller will actually have to agree to such a release?

If the seller refuses to release the deposit, the only recourse the buyer has is to sue the seller and the deposit holder in small claims court. In those situations, buyers are rightfully upset. Even if the buying Realtor has explained to the buyer that this possibility exists, it will still be upsetting when and if it actually occurs.

They will also be upset because they now have to incur the cost and the time of retrieving that deposit through the court system. Many of them will have to spend even more money for legal advice. Sadly, if the deposit is large enough, many buyers will not be in a position to purchase another property until they retrieve these funds.

In these situations, buyers also get upset at their Realtors and usually the listing brokerage. It’s a poor reflection on our industry.

My suggestion is to use a clause for conditional sales that protect your buyer from this unpleasant situation, such as this:

“The Seller agrees in the event that the Buyer does not waive the conditions within the dates and times as set out in this agreement and its amendments, the Seller gives the Deposit Holder, the Brokerage or other Party holding the deposit an irrevocable direction to release the deposit to the Buyer without the necessity of a Mutual Release signed by either Party.”

RECO’s basic position is that as long as it has been explained to both parties what this clause means, it has no problem with the clause. The use of the clause in conditional agreements provides several benefits. First, the deposit no longer becomes an issue between the buyer and seller and their respective salespeople. Understand that if the deposit is released by the deposit holder to the buyer, this does not negate the seller’s right to sue the buyer for damages in the event the seller feels the buyer did not act in good faith with respect to the conditions that were used in the agreement.

Secondly, the deposit can now actually be given back to the buyer as the conditional clause states in the Agreement of Purchase and Sale. The buyer will have his deposit and is free to purchase another property.

Thirdly, brokerages and their Realtors are no longer stuck in the middle of this dispute.

Brokerages should seek their own legal opinion if they plan on using this clause. It should be said that this is not a huge problem in our industry and more often than not all parties sign a mutual release and the buyer and seller are free to pursue their real estate needs. However, I believe buying Realtors should protect their buying clients from unco-operative and/or obstinate sellers who have been properly served in writing to the fact that the condition(s) in the agreement have not been met, but refuse to release the deposit simply because they can.

Most large brokerages in Ontario send files to RECO every year with deposits for deals where sellers have refused to release the deposit. It’s time we do something about it.

  • PED

    That is true the seller can still proceed, however because the ‘good faith’ deposit is in escrow it is going to be awarded the seller (provided it is not considered excessive) in its entirety if the buyer did not act in good faith. Thus it holds the buyer’s feet to the fire to pursue the fulfilling of conditions in good faith knowing that they not only will lose that amount but perhaps also more for damages. Without a known amount to bargain over the future holds no promises for ta seller to collect.

  • Carolyne L

    Here in the GTA, if a would-be buyer has made a conditional offer on any given brokerage property listing and he is not able to fulfill the conditions noted in the APS but then wants to offer on a different listing at that same brokerage, not yet having had his deposit returned, mutual releases still must be signed in order to apply the designated funds held in trust to another property in the same brokerage. Why? Because the deposit money is tied to each specific property listing, in turn. Individually tracked, monitored, and audited. And cannot be used for any other purpose.

    The brokerage itself is not “party to that contract” and cannot and must not contra/transfer that trust deposit to attach it to property number two. Verboten.

    Using the mutual release process, the deposit first allocated must be mutually released by (all) the parties to the first contract (not just one party, or even some). Not just to the person who physically wrote the deposit cheque.

    A real example… An agent sold one of my listings. When the transaction didn’t come together as expected, the agent’s buyers’ lawyer, (located in Woodbridge) called me. Best guess, the buyer apparently owed him money. The lawyer demanded, not requested, that I release that APS property-specific deposit “to him,” and that i must do so before the day was out.

    WHAT? I explained that he above all people should know I could not do that! He insisted, saying: “don’t you know who I am? I am a lawyer?” Of course I couldn’t resist… I replied: “and don’t you know who I am? I am president of the company and the corp broker?”

    “The deposit is in the company trust account where it will stay until I am legally directed what to do with it. I suggest you talk to the seller’s lawyer. It is not within my control to give that deposit to you, under any set of circumstances, and who should know that better than you?”

    Beyond that I advised my seller clients to attend at their lawyer’s office right away, as the buyer’s lawyer indicated “he” was going to pay a personal visit to the sellers. Really?

    We deal with all sorts of odd situations. I needed to keep things under control; my sellers were in their late 60’s and not business people, therefore definitely could easily have been intimidated by his huffing and puffing and noisy attitude. He was quite outrageous. Many agents receiving such calls would have succumbed to his threats. Brokers, too. Be extra careful to whom you indicate as the Payee, when releasing deposit funds. That deposit belongs to all parties to the contract.

    Back to the deposit and possible secondary purchase: The deposit money is then returned to the buyer(s), written specifically to match exactly the amount reflected in the copy of the original cheque and account holder, (better be sure there is always a copy of the original cheque, money order, bank draft, in the office property-dedicated file) unless a direction is produced signed by “all” parties to that contract, stipulating otherwise, who can then use it for whatever purpose he likes, including using the appropriated funds to offer on property listing number two, at the same brokerage.

    And, no the buyer cannot instruct in writing or otherwise that the brokerage named as the agent, to write that deposit amount over to any other brokerage from whom the buyer would like to engage in preparing another APS.

    But the buyer had better have legitimate proof if called upon to support his reason for not fulfilling the first contract conditions. If he just changed his mind, that, typically, is not acceptable.

    This situation wherein a would-be buyer perhaps discovers a new listing he would like to offer on, at the same brokerage can be, literally, held hostage in such a situation, unable to engage in negotiating a secondary offer, if he is not able to produce a deposit using some other method, and does not yet have mutual releases in hand permitting his deposit to be returned. More than one buyer has been frustrated by the mutual release process. And you can bet he bad mouths the company for holding his deposit hostage.

    http://www.carolyne.com/downpayment.html

    Question: Does any seller agent, currently, advise his seller client to request on the listing, as a heads up courtesy to agents showing the property, to include a letter of commitment (subject to appraisal) from the would-buyers finance provider, with any offer?

    We often had to do that years ago and it kept everyone on their toes in regard to offers with COF requirements, eliminating surprises.

    Carolyne L 🍁

  • RECO has posted the following on its website:

    When a deal falls through, understand how to handle written consent to release the deposit

    December 28, 2016

    By Joseph Richer

    In a recent post on REM Online, Vito Campanale proposed an alternate way to obtain consent from buyers and sellers, in order to release the deposit back to the buyer if conditions are not fulfilled. This article presents RECO’s position on Mr. Campanale’s proposal.

    When an agreement of purchase and sale falls through, RECO’s position is that the deposit should be disbursed only if the parties have agreed in writing that the money be released, or by court order. This is reflected in our Registrar’s Bulletin on the topic. Registrant questions primarily revolve around how they establish the parties’ written agreement to the release of the deposit monies.

    There are different ways to get written approval to release deposits. In fact, before writing his article, Mr. Campanale contacted RECO to confirm that his process would not violate the Real Estate and Business Brokers Act, 2002 (REBBA 2002) and the Code of Ethics.

    At the basic level, Mr. Campanale proposes including the following clause in an Agreement of Purchase and Sale, which must be understood and agreed to by the parties to the agreement:

    The Seller agrees in the event that the Buyer does not waive the conditions within the dates and times as set out in this agreement and its amendments, the Seller gives the Deposit Holder, the Brokerage or other Party holding the deposit an irrevocable direction to release the
    deposit to the Buyer without the necessity of a Mutual Release signed by either Party.

    There is nothing in REBBA 2002 that would prohibit the use of this clause to satisfy the requirement of written direction.

    That said, it’s important to emphasize that the buyer – and more importantly, the seller – must clearly understand what this clause means, and agree to it. In addition, both the buyer’s brokerage and the seller’s brokerage should acknowledge their agreement with the direction, by initialling it, for example.

    RECO also strongly recommends that both parties get independent legal advice before they proceed.

    In general, RECO encourages buyers and sellers to make decisions only when they have all the information, which usually is when the deal has failed. Mr. Campanale’s clause commits sellers to releasing the deposit when the conditions are not met—before they know the specific
    circumstances that caused the deal to fall through.

    As such, RECO continues to recommend the leading practice of only disbursing deposits by mutual agreement in writing or court order, after the deal has failed. However, provided that proper informed agreement is obtained, along with independent legal advice, using Mr. Campanale’s proposed clause would not violate REBBA 2002 or the Code of Ethics.

    Before recommending the use of such contractual terms, you should always consider whether it is in your client’s best interests. As a real estate professional, that’s your duty to your client.

  • Omer Quenneville

    Conditional clauses need to be more specific. Conditional on financing should state the interest rate, term etc. Having an open ended clause that permits the buyer to walk for any reason and then not releasing the funds is not what we should be doing or leading our clients into. Requiring a mutual release from a deal that is not a deal never made sense to me. Using a clause like the one stated in the article solves this problem and is in both clients interest given the current standard of writing conditional offers. You want to hold your clients feet to the fire, write more specific conditional clauses. I had a case once where an offer was conditional on financing and the terms of the mortgage were stated as part of the condition. The buyer refused to waive the condition stating that the terms were no longer available as stated in the condition. The seller gave the buyer the mortgage as per the terms in the condition and the deal was done.

  • Rita Giglione

    Yes you are correct Vito, and RECO has detailed exactly how to use this clause. In over 25 years in this industry I have never had a problem with getting a mutual release signed.
    Thank you.

  • PED

    I’d suggest this clause to my buyers because it is to their advantage but advise my sellers against it because it’s not to their advantage if the buyer gets cold feet and chooses to not pursue with fulfilling the conditions. From the seller’s point of view it holds the buyer’s feet to the fire, reduces the risk of brokerage error in releasing the funds and maintains the deposit as the minimum amount of available damages. I’d also suggest they get a legal opinion from their attorney.

  • Dave says

    The RECO registrars position is clear and Vito’s claim that RECO approves his clause is incorrect and dangerous. Read the “Registrars Bulletins” on the RECO website and/or take the Real Estate law course.

    • RECO has indicated to REM that “there is nothing inaccurate” in Vito’s column. However they are writing a clarification for us. We will post it as soon as it arrives.

      • Dave says

        You should post my comment as currently you are giving legal advice to your readers that may be incorrect and could draw R.E.M. Into a court challenge.
        Dave P

      • Dave says

        Hi Dave,

        Here is what I sent to my reps yesterday, what was your comment to REM?

        There was a resurgence of a “deposit release” clause in REM recently that you may either see on an offer or wish to use on an offer. It would be prudent for you to read the following and do not use or accept such a clause.

        Your Legal Questions, Answered!

        Below, are the most Recently Asked Questions submitted by OREA Members and answered by Merv.

        Recently Asked Questions

        Dec 11, 2016I have had a couple of deals this year where I needed a Mutual Release and while there was not a problem with deposit return, I just saw this clause suggested in a recent issue of REM and am wondering if it is a good one to use in the future on all conditional deals – “The Seller agrees in the event that the Buyer does not waive the conditions within the dates and times as set out in this agreement and its amendments, the Seller gives the Deposit Holder, the Brokerage or other Party holding the deposit an irrevocable direction to release the deposit to the Buyer without the necessity of a Mutual Release signed by either Party.”
        Just to be clear, the clause that you have quoted in your question is not an OREA-suggested clause.
        Look at many of the prior Legal Forum Q&As under Topic: Failure to Close, Subtopic: Deposits. Many of those prior Q&As reiterate that there are only two ways to release deposit monies from trust – Mutual Release or Court Order.
        For example, there is this Q&A dated Sept 4, 2013 – Question: Is it an expensive process to get a judge’s order to release funds from a real estate trust account? Is there another procedure, other than closing or mutual release, to disburse funds from a real estate trust account? My listing; offer accepted; all conditions removed; buyer did not close; deposit sitting in our trust account; seller wants deposit; cannot get buyer to sign a mutual release. Merv Says: Those are the only two procedures – a mutual release or a court order. The Sellers should discuss costs with their lawyer as that will depend on their fee schedule and what the Buyer does in response. Many Buyers will settle the matter when they receive a letter from a lawyer or court papers. If you type “mutual release” in the Legal Forum Search box you will see many other Q&As, especially under Topic: Failure to Close, Subtopic: Deposits. See also OREA’s online pamphlet Deposits and the Terminated Transaction and also the OREApedia article on the Real Estate Trust Account in particular Subtitle 4.1 – Deposits and the Terminated Transaction. There is also a RECO Registrar’s Bulletin on Failed Agreements of Purchase and Sale: Return of Deposits.
        See also this very similar prior Q&A dated Feb 18, 2013 which asks about a clause to be added to the APS to protect the seller – Question:Can an additional clause in a Schedule to the APS create an exception to the rule that if the deal doesn’t close client money can only be released from a brokerage’s trust account by a mutual release being signed by both parties or by a court order? My seller client’s lawyer wants to add an extra clause to this effect – “Buyer acknowledges that if Buyer is unable to or refuses to close after all the Buyer’s conditions have been fulfilled or waived, then deposit monies can revert straight to the Seller.” Can this clause override the rule that a brokerage cannot release client funds from its trust account without a mutual release or a court order? Or can the brokerage’s registration be in jeopardy if it releases funds on this basis? Merv Says: As to several deposit issues, you should refer to OREA’s online pamphlet Deposits and the Terminated Transaction. See also OREApedia articles such as Real Estate Trust Account and Offers/APS – Deposits. There is also a RECO Registrar’s Bulletin on Failed Agreements of Purchase and Sale: Return of Deposits. All of them reiterate the need for a Mutual Release or Court Order despite the attempted language in the APS. Whatever the position of the Clients might be, the REALTORS® should protect themselves and follow the REBBA requirements rather than get in the middle of discussions about the Seller’s conduct, whether rights to damages will continue to exist despite the release of the deposit, commission claims, and ongoing responsibilities of the REALTORS®. There are many other prior Legal Forum Q&As under the Topic: Failure to Close Subtopic: Deposits, Topic: Failure to Close, Subtopic: Commission Issues and Topic: Offers, Subtopic: Deposits.

        John W. Meehan

        Former President of the Toronto Real Estate Board

        Broker of Record/Owner

        RE/MAX Unique Inc., Brokerage

        Independently Owned and Operated

        1251 Yonge Street, Toronto, Ont. M4T 1W6

        416-928-6833

        OREA Provincial Director http://www.orea.com

        • Dave says

          Thanks for the reply John. As you know everyone needs to understand that Brokers must never release a deposit from their trust account when there is any doubt about the legality of the act. The REBBA Registrar could order the Broker to immediately replenish the funds to the trust account failing which the Brokerage could be suspended which would in effect destroy the firm with no hope of recovery.
          Vito may mean well with his advice but he is not the REBBA Registrar and a no one at RECO other than the Registrar has the authority to modify or clarify the Registrars bulletin regarding deposits.
          I also believe REM should use caution when allowing columnists to give legal advice without a disclaimer.

  • Andy Birch

    I agree with Dave to not use this clause anywhere. Conditional offers by buyers are made for their own benefit and not the sellers. These conditions can be waived unilaterally by the buyer. Using the mutual consent forms only empowers the seller who may out of malice, discontent, or revenge seek to “punish” the buyer for either his failure to remove the conditions, or his failure to act in “good faith” in removing conditions. It is not for the seller to determine whether the buyer did or did not act in good faith, which if he kept the deposit, he would have to prove in court as well as any damages they suffered. Also, any substantial deposit by the buyer would likely affect the direction this process would take. Moreover, the buyer may register a caveat on the seller’s title thereby, further frustrating his efforts to sell the property. Better for the seller to just “walk away”, return the deposit, rather than deal with a disingenuous or “hostile” buyer. The cost, delay and time spent seeking remedy by the seller does not accomplish the end goal, which is to sell a home.

    • Steve Flynn

      I believe that is exactly what Vito is saying. It isn’t up to the Seller to determine whether the Buyer did or did not act in good faith. This clause gives the listing brokerage the right to return the deposit without a mutual release, thereby taking the Seller’s power (malice, discontent, revenge seek to punish) away. However, it still allows the Seller to sue the Buyer if they deem it appropriate because no mutual release was signed. As well, it allows the Buyer to move on to other property with their deposit having been returned.

  • Dave says

    I would not advise anyone to try this clause in Ontario before there is a clear message from the Registrar of Real Estate that he finds it acceptable. In my opinion it contradicts REBBA and could prove costly when the Registrar demands that the Broker of Record immediately replenish the brokerage trust account failing which brokerage registration will be suspended.

    • Rita Giglione

      I agree with Dave.

  • Graciela

    Would the brokerages involved not still have to sign the Mutual Release, as they are also party to the transaction?
    Another way to get around this problem is to have the deposit payable upon the deal becoming firm.

    • Carolyne L

      In what Province (or State) is the REALTOR(r), agent, registrant, or the real estate brokerage a “party to” an Agreement of Purchase and Sale contract?

      Over the years posting at REM, I have addressed the “party to the contract” topic explaining how, as a new agent 35 years ago, I inquired as to that issue during a general board membership meeting. Not long after, all the standard forms that had been used forever, got changed.

      New agents really need to probe deeper into the history, maybe: how things used to be done. It would be useful, or just interesting to some, perhaps.

      This topic related article is very old, but might provide a little useful information that still applies:
      http://www.carolyne.com/sellerinfo.html

      And,

      http://www.carolyne.com/buyerinfo.html

      Not selling anything, just sharing.

      ===

      Off topic: Do you ask your sellers to prepare a package for their buyer, to leave behind or have ready if a pre-buyer discussion requests such householder owner information?

      The package being, copies of bills and names of who supplies necessary particular services such as hydro, furnace gas or oil, online local services, hook up and repair numbers, and lists of contract support or rental services such as alarm systems, snow removal, lawn care. Sump pump problems; if a quite new house, builder person specific contact information.

      Typically real estate lawyers closing systems do not include information on rental contracts, even if noted on the APS. It’s up to the buyer and seller to figure it all out, often after the fact when it is discovered that, for example, the alarm is going off and the alarm company will not take your middle of the night call because “you” are not their customer. No way to shut it off. Police come and “pull it off the wall.”

      Likewise a badly installed builder sump pump that starts “screaming” metal on metal in the middle of the night on Christmas holidays. Call a plumber?

      When told the newish house AC system was builder installed, with 5 yr warranty and that turned out not to be true; the seller installed it, and it died on moving day, who do you call? On a long weekend when parts departments are closed and it’s 34 degrees C and humid.

      A “who to contact” package left behind would be very useful in such a circumstance, or an appreciated common courtesy. I always instructed my sellers to leave at the very least, the basics contact information.

      Many many years ago, as in the 70s and 80s, some closing law offices arranged change of ownership on related accounts. I don’t know of any law firm or closing who provides that service in recent years. They mostly only request final billings amounts.

      I believe there might be a business opportunity brewing, with every homeowner buyer and seller sitting on phone lines literally for hours or on line with need of support to complete arrangements, even more so when moving to a new area where suppliers are completely different and sometimes several choices from which to do business with.

      Carolyne L 🍁

    • Dave says

      We usually sign the release but not when we have a dispute with one of the parties to the transaction. The listing Brokerage’s signature is not required on the release nor is that of the Brokerage representing the buyer.We believe the deposit should be returned if signed by the parties to the transaction and of course the Brokerages are not a party to the transaction.

  • J Jan

    Vito …thanks for the topic and your suggestion…

  • News__Reader

    Here in Saskatchewan we don’t require a mutual release form signed. The offers clearly state, “If this offer is accepted and conditions in (paragraph X of contract) have not been satisfied or waived in writing by the date set for in (paragraph X), the entire deposit and any other monies paid by the Buyer shall be forthwith returned to the Buyer.” Upon a collapse of a deal where conditions have not yet been removed within the allotted time, a Buyer’s Brokerage is within their rights to release the deposit to the Buyer.

  • Basie

    Interesting idea.