Think a Real Estate Contract Isn't Binding Without a Deposit? Think Again!

A common misconception in Ontario real estate is that an offer to purchase a property isn’t legally binding until the deposit is received. This belief likely stems from general contract law, where "consideration"—something of value exchanged between the parties—is required to make a contract binding. However, in the context of real estate transactions in Ontario, this is not the case. Once an Agreement of Purchase and Sale (APS) is signed by both the buyer and the seller, it becomes a legally binding contract, regardless of whether the deposit has been paid.

The Legal Binding Nature of an Accepted Offer

In Ontario, when both parties sign the APS, they are immediately bound to the terms of the agreement. The deposit, while important as a show of good faith from the buyer, is not necessary for the contract's validity. If the buyer fails to provide the deposit, they may be in breach of the contract, but the agreement itself remains enforceable.

Legal Precedent: Dhatt v. Beer (2022 ONSC 5168)

The case of Dhatt v. Beer, 2022 ONSC 5168, underscores this principle. In this case, the Ontario Superior Court of Justice ruled that the APS was binding despite the buyer's failure to provide the deposit within the agreed timeframe. The court confirmed that the APS remained valid once it was signed by both parties, highlighting that the absence of a deposit did not nullify the agreement.

You can read more about the case here.

The Role of Consideration in Real Estate Contracts

The misconception about the deposit's role in making an offer binding may come from the concept of "consideration" in contract law. Generally, for a contract to be enforceable, there must be consideration—something of value exchanged between the parties. In real estate, the consideration is typically the mutual promises made within the APS itself, such as the buyer's promise to purchase and the seller's promise to sell under agreed-upon terms. Therefore, the deposit, while important, is not the consideration that binds the contract; it is the promises made in the APS.

What This Means for Buyers and Sellers

• For Buyers: Once you sign the APS, you are legally committed to the purchase, even if the deposit hasn’t yet been paid. Failing to provide the deposit could result in legal consequences, including the possibility of being sued for breach of contract.

• For Sellers: Be aware that an accepted offer is binding once the APS is signed, even if the buyer hasn’t provided the deposit. If the buyer fails to deliver the deposit, you may have the right to pursue legal action, but the contract itself remains enforceable.

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Conclusion

Understanding that an Agreement of Purchase and Sale is legally binding upon signature—regardless of when the deposit is received—is crucial for both buyers and sellers in Ontario. Misunderstanding this aspect of real estate contracts can lead to serious legal implications.

For more detailed advice or if you're facing a similar situation, it's always best to consult with a real estate lawyer or a knowledgeable real estate professional.