Failed agreements of purchase and sale

Bulletin #2016-3

An Agreement of Purchase and Sale (“Agreement”) may not be completed for a number of reasons, including unsatisfied conditions relating to matters such as financing, rezoning approval, a home inspection or the sale of a buyer’s current home. This failure to satisfy a condition may raise an issue about the return of the deposit held in a brokerage’s real estate trust account.

The wording of a condition clause in an Agreement, for example, “This offer is conditional upon the buyer obtaining satisfactory financing within five banking days, failing which the deposit shall be returned to the buyer in full without deduction” may appear to be clear in terms of the return of the deposit if the condition isn’t waived.

However, in some cases the courts, in reviewing a condition clause in an Agreement, have imposed obligations on the party who is to satisfy the condition. For this reason, a party to the Agreement may dispute the return of the deposit and the issue of entitlement to the deposit may have to be resolved by the courts.

Sec. 27(1) of the Real Estate and Business Brokers Act, 2002 (the “Act”) requires a brokerage to maintain a properly designated trust account at a recognized financial institution. All trust funds must be deposited in the account of the brokerage named in the Agreement to hold the deposit. Sec. 17(1) of Regulation 567/05 (GEN) made under the Act requires that a deposit received by the brokerage who under the Agreement is to hold the deposit must be deposited in that brokerage’s real estate trust account within five business days of receipt.

A brokerage may only disburse the funds held in the real estate trust account in accordance with the terms of the trust. This is important to the purposes of the Act – consumer protection and regulation of trading in real estate. Breach of trust is an offence contrary to Sec. 27(1) of the Act; a criminal offence under the Criminal Code of Canada; and may create a civil cause of action against the trustee, i.e. the brokerage.

Brokerages as trustees of a consumer’s money have important responsibilities, including a legal duty to observe a high standard of care and to act impartially when dealing with potential beneficiaries of a trust. The proper course of action in the case of a failed Agreement is to disburse the trust money in accordance with a release or direction signed by the parties to the Agreement or pursuant to a court order. The parties to the Agreement are the seller and buyer. If the parties to the Agreement are or become involved in a court action it may be possible to arrange to have the deposit money held in trust paid into court. The advice of a lawyer may be advisable in any of these situations.

In summary, in the case of a failed transaction, a brokerage should only disburse the deposit in two circumstances:

1. If both parties have agreed that the money may be released in writing. The timing of the written agreement to release the money may vary, but RECO recommends brokerages obtain a release in writing from the parties after the purchase agreement has failed.

2. Upon receipt of a direction from the Court (Court Order).

Trust account

Section 27(1) of the Act

27. (1) Every brokerage shall,

(a) maintain in Ontario an account designated as a trust account, in,

(i) a bank, or an authorized foreign bank, within the meaning of section 2 of the Bank Act (Canada),
(ii) a loan or trust corporation, or
(iii) a credit union, as defined in the Credit Unions and Caisses Populaires Act, 1994;

(b) deposit into the account all money that comes into the brokerage’s hands in trust for other persons in connection with the brokerage’s business;

(c) at all times keep the money separate and apart from money belonging to the brokerage; and

(d) disburse the money only in accordance with the terms of the trust. 2004, c. 19, s. 18 (18).

Trust funds

Section 17 of Regulation 567/05

17. (1) If an amount of money comes into a brokerage’s hands in trust for another person in connection with the brokerage’s business, the brokerage shall deposit the amount in the trust account maintained under section 27 of the Act within the five business days.

(2) In Subsection (1), “business day” means a day that is not,

(a) Saturday, or
(b) a holiday within the meaning of Subsection 29(1) of the Interpretation Act.

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