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