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Consumer Guide to Deposits

Consumer Guide to Deposits

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This FAQ details when deposits are paid, how they are held and who is entitled to a deposit should a property sale collapse prior to closing. The rules around deposits associated with rental properties are also discussed.

Most offers to purchase a property include provisions for a deposit. While a deposit is not required to create a binding contract, it is typically viewed as a good faith gesture to show a seller that you are serious about purchasing their property.

There is no legal requirement for a money deposit, and alternatives like bonds, cryptocurrency, and commodities are legally possible. It is recommended that consumers take legal advice respecting such alternatives before agreeing to them.

When does a buyer pay a deposit?

Buyers and sellers can negotiate any terms into a real restate purchase contract including when a deposit is due. In most cases a deposit will either be given to the seller when an offer is accepted, or when subjects are removed by the buyer. You should discuss the pros and cons of each option with your real estate professional.

How much does a deposit need to be?

While five to 10 per cent of the purchase price is typical for a deposit, any amount can be negotiated between a buyer and seller. Speak with your real estate professional to determine what is in your best interest and what amount will satisfy the other party.

Does the deposit form part of the down payment?

Yes. Once your deal completes, your deposit will be added to the rest of your down payment to form the total down payment you agreed to with the lender. The lending institution will then pay the remainder of the funds owed to the seller.

Who holds the deposit?

Just like the timing of a deposit, who holds the deposit can be negotiated between the buyer and seller. In most cases, the brokerage (agency) representing the buyer will hold the buyer’s deposit until the deal completes.

Regardless of who is holding a deposit, it is always best practice to ensure the deposit is held in trust and you should request a receipt from the holder of the deposit. The trust account protects the funds should there be a dispute down the road and will prevent either party from absconding with the money.

One of the advantages of providing the deposit to your real estate professional is that the Real Estate Services Act requires that it be deposited promptly into the brokerage trust account, protecting the funds. It is not possible for your real estate professional to hold the cheque themselves, even if that is what you request.

Should you want to have a third party hold the deposit funds, you should seek independent legal advice to ensure you understand the risks.

Does my deposit have to be given in cheque form?

No. A deposit can be given in any form both parties to the sale agree to, including cheque, certified cheque, cash, wire transfer, and electronic transfer. It is always advisable to use a form of payment that can be replaced should it be lost or stolen before it can be deposited.

If you are issuing a certified cheque, avoid making it out to cash. Should that cheque be lost or stolen, financial institutions may charge to a fee to cancel the cheque and issue a new one. This process can also be cumbersome and time consuming.

Please note that currently digital currencies such as Bitcoin cannot be held in trust. For that reason, if the deposit is in a digital or crypto currency, a third party will have to hold it. Get legal advice if this is an option for you.

If my deal collapses, can I keep the deposit?

This will depend entirely on what was agreed to in your contract. Keep in mind, however, that if the funds are held by the brokerage in trust, even if the contract stipulates that if the deal collapses, you are entitled to the deposit, both parties will need to sign an agreement agreeing to it.

When a real estate brokerage holds a deposit in trust, they hold it as a stakeholder. That simply means that they do not hold it for the benefit of the buyer or seller, but as a neutral third party. This is true despite the brokerage representing one of the parties. This stakeholder provision is what protects the interests of all parties to the transaction.

Because your real estate professional is not a lawyer and will not be able to be determine whether the reason for the deal collapsing was one party’s fault over the other, they will only release the funds when both sides agree. If there is a disagreement over who gets the funds, the deposit is paid into court, and the court will decide.

What about deposits for a rental property?

If you are a landlord who has hired a rental property management company to manage a property, you may have contracted to have them collect rental deposits on your behalf. If the landlord is collecting the rental or pet deposit, they are not holding those funds as an independent stakeholder, as in the deposits associated with a property sale. They are holding the funds for your benefit.

If, at the end of the tenancy, it is determined that there was damage to your property and you instruct your rental property manager to turn over the deposit funds to you, they will do so.