Law360 Canada (August 26, 2026, 9:16 AM EDT) --

Balvinder Kumar

The law relating to deposits in real estate transactions has always been critically crucial. It becomes a focal point when any real estate transaction collapses. When the deal falls apart, the tussle begins: who gets the deposit — buyer or seller?

When a purchaser fails to close an agreement of purchase and sale, the vendor is entitled to retain the deposit. If the seller does not complete the transaction and fails to close, the purchaser is entitled to the return of the deposit. But is it ever that simple and easy?

This appeal case, Lockhart v. Glidden, 2026 NBCA 66, addresses the current legal framework regarding deposits. In this case, the buyer wrongly repudiated a purchase and sale agreement in a real estate transaction. The parties signed a standard form of agreement of purchase and sale (APS) with a $50,000 deposit to be credited towards the purchase price. The agreement specified that the deposit would be forfeited to the vendors without interest or penalty by way of liquidated damages if the purchasers defaulted. The vendors also had the option of compelling the purchasers to complete the sale.

The purchasers raised objections to the title on closing day, requesting the two encumbrances on title to be discharged on the same date. The vendors asked for an extension, which the purchasers refused. The vendors had to resell the property and incurred $18,294.12 in damages. The vendors filed an action claiming that the purchasers wrongfully repudiated the contract, sought a declaration that the deposit be forfeited in their favour and requested damages.

Although the motion judge determined that the purchasers had wrongly repudiated the contract, the judge also found that the vendors were only entitled to their actual damages, and that the remaining portion of the deposit should be refunded to the purchasers. The vendors appealed this decision regarding the return of the deposit.

Before analyzing this case, let’s understand the purpose of a deposit in a real estate transaction. A deposit is paid as a guarantee or as security for the performance by the purchaser, and on the default of the purchaser, the vendor is entitled to retain the deposit. The court highlighted the summary of the law of deposit, stating a “deposit is not part of the contract of purchase and sale, but ‘stands on its own as an “ancient invention of the law designed to motivate contracting parties to carry through with their bargains,” “something which binds the contract and guarantees its performance,” and is an “earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.’” The possibility of its forfeiture provides a reason or a pressure for the purchaser to complete the purchase, failing which the purchaser will lose the deposit.

The appeal case revolves around the law of deposits. The Court of Appeal analyzed many cases to summarize the treatment of these deposits. The court established what a “true” deposit means. A true deposit is not only a part of the purchase price but is treated as earnest money to secure the agreement. It is not contingent on whether damages occur; a true deposit will be forfeited even if the vendor resells the property at a higher price. The ancient law has also established that the forfeiture of a deposit is valid “even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract.”

The special treatment afforded to such a deposit derives from the ancient custom of providing an earnest for the performance of a contract in the form of giving either some physical token of earnest or earnest money. The history of the law of deposits can be traced to Roman and English law, according to which “even in the absence of express contractual provision, it is an earnest for the performance of the contract: in the event of completion of the contract the deposit is applicable towards payment of the purchase price; in the event of the purchaser’s failure to complete in accordance with the terms of the contract, the deposit is forfeit, equity having no power to relieve against such forfeiture.”

It is often argued that since a true deposit is a security for the purchaser’s performance of the contract and is in no way related to damages for breach of the agreement, the vendor, in the event of repudiation by the purchaser, can keep the deposit as forfeited and sue for damages. The appellants in this case took this position in their statement of claim before the motion judge. The motion judge correctly distinguished between a true deposit and a mere partial payment towards the purchase price and found the deposit paid by the respondents was a true deposit.

But since the law does not allow double recovery, the motion judge stated that allowing the appellants to both keep the full deposit and recover damages separately would result in double recovery. The Court of Appeal relied upon some established case laws that stand for the principle that the deposit must be applied towards damages when the vendor retains the forfeited deposit and seeks damages. Only damages exceeding the deposit amount can be recovered and awarded by the court. The respondents argued that the appeal must be dismissed as the respondents chose to accept repudiation rather than pursue specific performance, a remedy that might have resulted in no damages. The APS stated that the seller had an option to compel the buyer to complete the sale. Rather, they rendered the APS null and void and therefore the deposits should be returned. The Court of Appeal held that this is not a situation where the APS became null and void.

Hence, the appeal was allowed and lower court’s judgment set aside. The appellants were awarded the entire deposits and costs.

Takeaways

Balvinder Kumar practises real estate law (residential and commercial) and is a freelance writer and author with LexisNexis.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author’s firm, its clients, Law360 Canada, LexisNexis Canada or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Interested in writing for us? To learn more about how you can add your voice to Law360 Canada, contact Analysis Editor Peter Carter at peter.carter@lexisnexis.ca or call 647-776-6740.