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The Ontario Court of Appeal (“ONCA”) recently dealt with the issue of a claim for the return of a deposit in a commercial real estate transaction in Benedetto v. 2453912 Ontario Inc. The appellant, who had made the deposit, argued that the pre-incorporation contract made pursuant to s. 21 of Ontario’s Business Corporations Act (“OBCA”), allowed him to recover the deposit. That section provides that a person signing on behalf of the anticipated company is personally bound by its terms unless, and until, later adopted by the then incorporated company. That personal liability can be expressly excluded in the pre-incorporation contract by sub-section (4).

The Facts

In this case, the deposit was $100,000.00. The Agreement of Purchase and Sale stipulated that the purchaser was signing “in trust for a company to be incorporated without any personal liabilities”. He then notified the vendor that he would not be completing the transaction and requested the return of the deposit. The vendor refused and the purchaser sued.

Law Respecting Deposits in Real Estate Transactions

A deposit, given to secure the performance of a contract for the sale of real estate is forfeited if the purchaser does not proceed with the transaction unless the bargain between them specifies otherwise. In other words, the Agreement of Purchase and Sale, or some other writing, must specifically provide for the return of the deposit. This is based on the Supreme Court of Canada’s (“SCC”) decision in March Bothers & Wells v. Banton.

It is important to note that the law does not consider the deposit as part of the contract of purchase. That act stands on its own, and where the main contract does not deal with it expressly, the law implies terms. The bargain is that if the contract is completed the deposit is taken into account but where it is not completed through the fault of the payor, the deposit is forfeited. The possibility of forfeiture is an incentive to complete the transaction. The forfeiture also compensates the vendor for the lost opportunity of having taken the property of the market as well as the loss of bargaining power for having now revealed the price at which they were willing to sell the real property.

Impact of the Business Corporations Act

The common law provides that the vendor, after the default of the purchaser, may sue for damages or other remedies. But here there was a contract for the sale of land on behalf of an anticipated company. Accordingly s. 21 of the OBCA alters the common law. The default rule as discussed above is that the purchaser is personally bound. Szecket v. Huang (ONCA) confirms that the purchaser is bound unless modified by s. 21 (4) or after the adoption of the contract by the then incorporated company.

Section 21(4) reads as follows:

(4) If expressly so provided in the oral or written contract referred to in subsection (1), a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.

1394918 Ontario Ltd. V. 1310210 Ontario Inc. (ONCA) makes it clear that where the subsection applies the vendor has no remedy against either the company if incorporated or the signer of the deal on behalf of the anticipated company.

Does Section 21(4) apply here?

The appellant argued that as there was no personal liability in the purchase contract that the same should apply to the deposit. In other words, the language in the main contract of purchase was broad enough to invoke s.21(4) with the result that the deposit should be returned to him.

This argument was rejected. The obligations created by the contract and the deposit are separate and distinct. The vendor has no recourse based on the contract of sale given the wording used but that does not absolve the payor of the deposit from his obligations. The language used must be specific to that obligation and clearly state that a contrary intention is present such that the deposit should be returned after non-performance by the payor. The interpretation suggested by the payor here would render a deposit meaningless.

Takeaways

  • The payor/appellant lost the appeal and paid $10,000 in costs on top of the costs of the motion below and most importantly the deposit of $100,000 all of which was paid for nothing gained;
  • This stresses the importance of legal advice and guidance in the purchase of real estate as the law of commercial real estate is both rigid and complex with potentially devasting consequences.

At Milosevic Fiske LLP, our team of Toronto corporate commercial lawyers regularly represent clients in complex commercial litigation matters ranging from straightforward contract and partnership disputes to complex multi-party commercial claims including dealing with claims of loss from real estate transactions. Over the years, our team of exceptional litigators has seen it all and has successfully fought for our clients’ rights. Our impressive track record speaks for itself.  Call us at 416-916-1387 or contact us online to schedule a consultation.