Recovery or retention of a deposit vs. a partial payment in real estate transactions after a purchaser’s repudiatory breach

Funds advanced by a purchaser of real estate to the vendor before the completion of the transaction are generally either considered to be a “deposit” or a “partial payment towards the purchase price”. The classification of those funds – either as a “deposit” or a “partial payment towards the purchase price” – is important and can affect who is entitled to the funds if the contract is terminated before the transaction completes as a result of a purchaser’s repudiatory breach.

A true “deposit” is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains.^[1] However, funds paid on account of the purchase price are generally not a “deposit”:

1. Unless the payment is expressly or by necessary implication susceptible to such a designation (e.g.: the contract specifically calls the advance of funds a “deposit”);
2. If the payment is large in comparison with the total purchase price; and/or
3.  Where the payment is made simply on account of and as part of the purchase price (e.g.: a down payment or an installment)._^[2]

Typically, in a situation where the purchaser has committed a repudiatory breach of the contract (i.e.: a breach that is sufficiently serious that it entitles the vendor to terminate the contract), and the vendor elects to terminate the contract:

1. If the funds are a “deposit”, the vendor will generally be entitled to retain the funds (unless the vendor’s retention of the funds would be penal or unconscionable) even in circumstances in which the vendor has not suffered any damages.^[3]
2. However, if the funds are a “partial payment towards the purchase price”, the purchaser will usually be entitled to the return of the funds advanced less any damages incurred by the vendor.^[4]

In conclusion, the classification of funds paid before a real estate transaction completes – either as a “deposit” or a “partial payment towards the purchase price” – will impact who retains the funds if the contract is terminated prior to closing as a result of a purchaser’s repudiatory breach. A vendor typically retains a deposit in the event of such a breach, while a partial payment(s) may be returnable to the purchaser less any damages incurred by the vendor. The distinction depends on the payment’s intent and the contract terms, highlighting the importance of clear contractual language in contracts for purchase and sale.

^[1] Tang v Zhang, 2013 BCCA 52 at paragraph 30

^[2] Victor DiCastri, Law of Vendor and Purchaser, 3rd ed (Toronto: Thomson Reuters Canada, 2020) at §16:36

^[3] Tang v Zhang, 2013 BCCA 52 at paragraph 30

^[4] Conner v Bulla, 2010 BCCA 457 at paragraph 17