In the last letter I discussed the importance of the deposit to the Contract of Purchase and Sale. A Victoria case shedding more light on the question of deposits was decided on May 10, 1996 by the Supreme Court of British Columbia. The case is Williamson Pacific Developments Inc. v. Johns, Southward, Glazier, Walton & Margetts.

Williamson agreed to sell property to a purchaser for $532,000.00 and a "non-refundable" deposit of $45,000.00 was paid against the purchase price. The contract provided that in the event the purchaser failed to complete the transaction, the deposit would be forfeited to Williamson on account of damages. The Purchaser failed to complete, but Williamson suffered no damages and, in fact, made a substantial profit by developing the property instead. Apparently, Williamson never believed it would suffer damages for failure to complete because it always believed the property to have a value greater than the purchase price.

A dispute arose between Williamson and its lawyers and a lawsuit resulted. As a part of that case the court was asked to determine whether Williamson was entitled to retain the deposit. Justice David Vickers decided that it was.

The old courts of equity in England established a rule against penalties long ago. The courts of law would enforce contracts; but the courts of equity took priority over the courts of law, so that contractual penalties could not generally be enforced. These principles continue and equity prevails even though the courts were merged into one in the nineteenth century.

Justice Vickers reviewed the case law and concluded that a deposit on the purchase and sale of land is exempted, by ancient practice, from the equitable rule against penalties. The deposit is treated as "earnest money" so that a defaulting purchaser will only get relief against forfeiture if the deposit is unreasonably large and the vendor is trying to disguise a penalty as a deposit.

In the Williamson case, the deposit was judged to be reasonable. Furthermore, it had nothing to do with damages, despite the reference in the contract to the deposit being on account of damages.

This case gives further confirmation of the importance of a proper deposit to a real estate contract. The deposit should be large enough to keep the purchaser "earnest", but not so large as to constitute a penalty or provoke a court battle regardless of who is in default.

Please call or e-mail me with questions or comments you might have.