The problem with deposits and what is a legal agreement anyway?

By Bruce Firestone | Business Coaching

Sep 19

Most agreements of purchase and sale have a number of elements in them—

A (small) deposit which is credited on completion

A down-payment (added to the deposit) on completion

A mortgage in 1st place from a major lender

And sometimes a 2nd mortgage seller take back from the seller or a 2nd mortgage from a private source or a 2nd mortgage from a self-directed RRSP

I try to keep deposits small (see below) because there can be a problem getting them refunded in case a deal goes sideways. I’d even put down a $2 deposit if I could, but most sellers won’t agree to that—they not only want more $$$ as a deposit, they also want it to go to their realtor’s agency (or their lawyer’s trust account).

Maybe you could get away with $2,500 on your deals?

The other reason a deposit is required is because under common law, a legally binding agreement must have 3 elements—

  1. An offer
  2. Acceptance
  3. Consideration (like money or sometimes property even personal property (like say a work of art or piece of jewelry) can be compensation/consideration for a deal to be binding on all parties)

And they must be in that order, otherwise no dice!

There’s a famous story—goes like this:

A guy is walking along the banks of a river and he sees a chap drowning.

“Help me! Help me!” cries the drowning man.

So, the guy hauls him out of the river.

“Thank you, thank you so much! You saved my life! I’m going to give you a $1,000!”

Wow, thinks the guy, I could sure use that 1,000 bucks.

The guy goes home and waits for his $1,000. And waits.

After six weeks, no money. He calls the chap he pulled out of the river who say, “Oh that. I was just kidding. LOL.”

Now, our guy is mad so he sees an attorney who tells him that because the consideration (the offer of $1,000 reward) came after offer was proffered and the service was provided, it’s not legal binding! The lawyer adds, “Next time, ask the drowning man if he’ll give you a $1,000 before you haul him out. That way you have a legally binding deal.”

Now obviously no good Samaritan WOULD EVER DO SUCH A THING. In fact, in France their Good Samaritan legislation prohibits this type of thing and requires that you provide aid.

FOR REAL ESTATE INVESTMENT AND BUSINESS COACHING THAT’LL HELP YOU PROVIDE FOR YOURSELF AND YOUR FAMILY FOR 3-GENERATIONS, PLEASE CONTACT:

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
Century 21 Explorer Realty Inc broker
Ottawa Senators founder
1-613-762-8884
bruce.firestone@century21.ca
twitter.com/ProfBruce
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brucemfirestone.com

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Image source: By US Army – https://media.defense.gov/2017/Apr/11/2001730347/-1/-1/0/170411-A-QY194-001.JPG, Public Domain, https://commons.wikimedia.org/w/index.php?curid=61824768

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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.

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