The Rules Of Deposit – Hypothetical Question

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It was interesting .. I was doing some random searches about various topics .. and something caught my eye. I continued to do more searches .. and I found this:

SOURCE: Ministry of Government Services: News Releases

New Real Estate and Business Brokers Act comes into effect today

Legislation Improves Safeguards For Real Estate Buyers And Sellers

QUEEN’S PARK — March 31, 2006 — People buying and selling real estate in Ontario will be better protected under the new Real Estate and Business Brokers Act, said Minister of Government Services Gerry Phillips.

“We know that …blah blah blah … and

The new act better protects consumers by:

* …..blah blah blah … , and
* Clarifying disclosure rules regarding the deposit of trust monies – interest on deposits remains with the deposit unless otherwise agreed to in the contract , and
* … more blah blah blah … etc

It was interesting to me, because I just had a conversation about deposit of trust monies .. Let me ask you for your opinion!

Our Hypothetical Situation

Suppose … you find the perfect house and go to the owner of the property and make an offer. He says no. So, you “up” the price and even offer to put up a large cash deposit. You, the purchaser, already have been pre-approved for a mortgage with your bankers, and the seller will get paid 100% of the funds at the time of closing. For argument’s sake .. let’s suppose this large cash deposit amounts to $50,000 cash inheritance you received from your grandmother.

Now suppose … this offer was really good for the property owner, and he agrees to sell his property to you, but with one condition. You see .. there is a zoning ordinance granted for him to manufacture something on his property. He wishes a condition to state that he must be able to find a suitable replacement property (doesn’t matter where), where he can both live and continue to earn a living by obtaining the same zoning variance on the new property. If he is unable to find a suitable location and obtain the zoning ordinance, he will not sell you his home. If he does find a suitable location and obtains a zoning variance, he will sell you his home.

This whole hypothetical question is about the interest that is earned on the $50,000 deposit

SITUATION (1)

* The seller finds a suitable replacement home, gets the zoning variance he needed .. and is able to sell the home to you. The deposit is used as a down payment towards the purchase price .. there are adjustments for property taxes, real estate commission, etc … and interest is earned in the Lawyer’s Trust Account.

[Q] Who Gets The Interest On The Deposit?

SITUATION (2)

* The seller does not find a suitable replacement home, and after 3 months gives up and does not agree to sell the home to you. The deposit is returned to you, and there is interest earned in the Lawyer’s Trust Account.

[Q] Who Gets The Interest On The Deposit?

SITUATION (3) – Let’s Make A Twist

* Suppose .. that your banker is willing to finance 100% of the purchase price of the house. In the agreement to purchase the property, you state that the cash of $50,000 is a refundable deposit, that regardless if the sale will go through (and the bank pays off the seller in full, and you get a mortgage) or if the sale does not go through … you want the cash that your grandmother left you .. so you can either buy new furniture for the new house .. or, put a deposit on another house.

* Also suppose, that the deal went through. The seller finds a suitable replacement house and sells the house to you. The banker pays the lawyer the full price and the lawyer returns your cash deposit to you, in tact. There was interest earned in trust on your refundable deposit.

[Q] Who Gets The Interest On The Deposit?

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I think for situation (1) and (2) it is obvious to me, that the seller should keep the interest earned in the trust account .. mostly for the reason that he agreed to sell at the time the deposit was received, in good faith. Had there been no conditions, he would have taken the money, it was his money, and he should keep the money earned on his money. As you know, the seller usually pays the real estate commission fees .. so, this interest also helps offset some of that cost (or of the lawyer).

For situation (3) I can see both sides of the argument. There are moral issues, and legal issues – I’m neither the moral or common sense police .. nor a lawyer. But, in the past dealings and accounting for purchases and transactions like this .. the reality is that the seller always earns the interest and receives a T5 Interest slip issued by the lawyer, “in trust” for the client.

However .. in Ontario .. according to the above changes to the Real Estate and Brokers Act .. if you STATE otherwise .. does that mean that YOU (the buyer) will now get to keep the interest earned on the deposit?

Something to think about in case you are placing a deposit on a property or investment…. I’m not sure how the rules are with Manitoba nor, do I want to follow up on the specifics of this matter .. but – I would be interested in hearing other people’s opinion about this – or, if you had similar experiences fighting over interest earned on deposits.

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