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Failed real estate deal clarifies role of deposits under OBCA rules of personal liability

|Written By Anita Balakrishnan
Failed real estate deal clarifies role of deposits under OBCA rules of personal liability
Jeremy Lum-Danson, an associate at Ross Barristers, says the decision avoids a situation where the prospective buyer of a property can have their cake and eat it, too.

An Ontario judge weighed in on a real estate dispute this week, deciding that a prospective buyer must forfeit his deposit after he pulled out of a deal, even though his pre-incorporation contract expressly protected against personal liability.

The Ontario Superior Court of Justice decision, Benedetto vs. 2453912 Ontario Inc., was issued July 24 by Justice Benjamin Glustein, who ordered that the agent that was holding the deposit, Re/Max West Realty Inc. Brokerage, release the deposit plus interest to 2453912 Ontario Inc.

At the core of the case was whether the deposit was part of the pre-incorporation contract or whether the two were separate issues.

Salvatore Benedetto, the prospective purchaser of the properties, said the deposit was part of the pre-incorporation contract, which protected him from personal liability, according to the decision. The seller, 2453912 Ontario Inc., said in the decision that the deposit stands on its own in case the contract is never performed.

In July 2017, Benedetto put down $100,000 from his personal account in deposits on the $7-million purchase of three adjacent houses on Huron Street in Toronto, the decision said. Benedetto never closed the agreement of purchase and sale of 661, 663 and 665 Huron Street, according to the decision.

The agreement was signed “Salvatore Benedetto In Trust For A Company to be Incorporated without any Personal liabilities,” according to the decision. Benedetto didn’t incorporate a company to adopt the purchase and sale agreement, and he decided in September 2017, two weeks before closing, that he would not proceed with the purchase.

According to s. 21(4) of the Ontario Business Corporations Act, “If expressly so provided in the oral or written contract . . . a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.”

But 2453912 Ontario Inc., which was going to sell Benedetto the Huron Street properties, said that previous cases indicated that a deposit is “compensation for the vendor taking its property off the market for a time, as well as for the vendor’s loss of bargaining power resulting from the revelation of an amount that the vendor would be prepared to accept,” the decision said.

Glustein concurred, writing that a deposit is “a sum of money to signify the formation of a contract.”

“It is not a pre-incorporation contract to which a purchaser could be ‘bound’ to its obligations or otherwise exposed to personal liability under the contract. Instead, a deposit is a payment to secure performance,” Glustein said in the decision. “Consequently . . . the deposit remains the property of the vendor if the purchaser fails to close the agreement of purchase and sale.”

Jeremy Lum-Danson, an associate at Ross Barristers PC, who represented 2453912 Ontario Inc., says the decision avoids a situation where the prospective buyer of a property can have their cake and eat it, too.  

“We gave something up — we stopped taking other offers, we took these properties off the market for a couple of months and we disclosed the price that we would sell these for. So, to say the contract is a nullity, in respect to the deposit, I said was ridiculous.

"Things happen. We held our end of the bargain,” Lum-Danson says.

Shahzad Siddiqui, managing partner at Abrahams LLP who represented Benedetto, said it was an interesting decision as neither party raised the issue of the deposit as a pre-incorporation contract in the facta. Siddiqui said Benedetto has not decided whether the decision will be appealed, but noted that one of the cases cited by Glustein in the decision doesn’t engage with the OBCA.
 
“Justice Glustein agreed that my client did everything to protect himself from liability,” Siddiqui says.

The judge said in the decision that there was no case law provided in which a party avoided personal liability by an express statement in a pre-incorporation contract.

“I find that a deposit is not a pre-incorporation contract,” Glustein said. “Rather, it stands on its own as an ‘ancient invention of the law designed to motivate contracting parties to carry through with their bargains.’”

Oliver Moore, senior associate at Norton Rose Fulbright Canada LLP, says the judgment makes sense and manages to chart a course between two concepts in conflict.

“On one hand, the deposit isn’t rendered meaningless, which would be an irrational outcome. And on other hand, the provision of the OBCA isn’t rendered meaningless, which would obviously not be an acceptable outcome either,” Moore says. “The conceptual conclusion of the case that it is possible to say — at one and the same time — two things. Number one, the deposit really is forfeit. And number two, the purchaser really is not bound. And the reason we can say that the deposit is not a pre-incorporation contract, and therefore the vendor’s claim to the deposit isn’t a claim against the purchaser personally. It’s merely taking the deposit already provided.”

Editor's Note: Story updated July 27 at 1:25 p.m. to include comment from Shahzad Siddiqui.


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