Speaking the Same Contractual Language: Trust Agreements and Deposits

For a buyer, signing an offer to purchase and handing over an initial deposit is often an exciting
time. Providing deposit funds can certainly make a deal seem much more real.

For real estate professionals, though, it is important to clarify for them just how important the process of holding a deposit in trust is. It is a real estate professional’s duty to ensure the terms of any trust agreement are satisfactory to their client’s needs.

A recent British Columbia Court of Appeal case illustrates why it is so important for real estate professionals to pay close attention to the language used in the terms of trust. In this particular case:

• The buyer signed an Agreement of Purchase and Sale to buy the seller’s residential property. The price was more than $2-million, and the buyer provided a $100,000 deposit to the seller’s real estate brokerage.
• The agreement stated that if the buyer defaulted, the deposit would “go to the vendor on account of damages.”
• The buyer failed to close by the completion date and the seller eventually sold the property to another buyer at a higher price. The buyer claimed the deposit should be returned because the agreement stated that it would be kept, “on account of damages,” and since the seller ended up selling at a higher price, there were no damages.
• The initial trial judge ruled in favour of the buyer and found the seller suffered no loss and therefore was not entitled to the deposit.
• The seller took the case to the Court of Appeal for British Columbia, where the judge overturned the lower court’s decision, finding that because of the language used in the initial agreement, the word “deposit” meant the money was exactly that.
• If the deal had closed, the deposit would have been applied to the purchase price. This is not the same as a penalty sum, which would have represented a genuine pre-estimate of damages.
• The appeal court’s interpretation of a “true deposit” is a sum that motivates the buyer to proceed with the deal and the fact that the seller sold the property for more money has no bearing on the agreement that the $100,000 was a deposit, forfeited because the buyer failed to close.

While this particular situation may not have been avoidable, it certainly helps when real estate brokerages have clear policies regarding the terms of trust in purchase contracts. Real estate industry members are expected to:

• Cleary explain to their clients the terms of trust.
• Use clear, ascertainable and unambiguous conditions (in this case, perhaps, “on account of damages” may not have been clear enough)
• Draft dispute resolution processes in case the broker acting as trustee cannot make a reasonable conclusion with respect to trust money entitlement.

Advise their clients that the trustee must follow the terms stipulated in the contract. For more information, read RECA’s Information Bulletin: Trust Money Disputes and Disbursements.

When drafting the terms of trust, have you ever considered whether your language could be misinterpreted and later challenged?