What Happens to the Deposit When a Deal Fails? 

Not being able to complete a home closing is a disappointing situation for both parties involved in a transaction, and it has consequences. When a transaction fails to close, the seller may have to put their property back on the market or delay the purchase of their next home, while the buyer may have to temporarily arrange for alternate accommodations if they have already sold their previous residence.

Unfortunately, real estate deals do sometimes fall through for a variety of reasons, including not being able to sell a previous home or secure a mortgage – something we see more when the economy slows down.

This brings us to the deposit, which refers to the money a buyer submits during the offer process as a show of good faith and to demonstrate they have the financial means to make the purchase.

If the buyer is working with a real estate agent, the deposit comes with some added protection. All agents participate in an insurance program, administered by the Real Estate Council of Ontario (RECO), which includes consumer deposit coverage.

When a deposit is given to a real estate brokerage in trust, the brokerage has certain legal responsibilities:

 - They must deposit the money within five days and maintain it in a designated trust account at a recognized financial institution.

 - They can only release the funds in accordance with the terms of the trust.

When a buyer is unable to complete the transaction, the deposit is not automatically released back to them, nor is it automatically given to the seller. Both the buyer and seller must agree in writing before the funds are released.

If the reason for the transaction not closing is a dispute between the parties and there is no agreement on what should happen with the deposit, the funds will be held by the brokerage until the matter is resolved by the parties or through court proceedings.

In the event that the dispute takes longer than two years to resolve, the deposit money must be provided to RECO, along with all relevant paperwork, until there is a court order or a written agreement by the parties directing how the money is to be disbursed.

These rules are in place to ensure the security of the deposit. There may, however, be some exceptions.

If the ownership of the money has been resolved, but the person entitled to the deposit can’t be located, the brokerage will forward the money and paperwork to RECO.

The insurance program administered by RECO covers the deposit in cases of theft or other loss when it is held by the brokerage as well, so you can see that there are protections in place to safeguard the deposit.

If you are in a situation where your transaction has failed to close, I would strongly encourage you to work with your agent to try and reach an agreement with the seller to return your deposit. And, as always, I think it’s wise to consult a real estate lawyer.