Deposits in Litigation: What Happens When Both Parties Claim the Money?

In failed real estate transactions—especially in a declining or volatile market—the deposit often becomes the centre of the legal dispute. Both the buyer and the seller may feel justified in claiming the money. But who is actually entitled to it? Whether the deal involved a resale home or a pre-construction unit, once a transaction collapses, the path to resolving deposit disputes often leads to court.

The Purpose of the Deposit

A deposit is more than a good faith gesture. Legally, it serves two main purposes:

• 1. Security for the seller in case the buyer breaches the contract
• 2. Evidence of intention to proceed with the purchase

The standard Agreement of Purchase and Sale (APS) in Ontario typically states that the deposit is held in trust—often by the seller’s brokerage or lawyer—until the deal closes or the parties agree in writing on its release.

When Both Parties Refuse to Release the Deposit

If the deal fails and both parties blame the other, neither can unilaterally claim the deposit. The money remains locked in trust unless:

• There is mutual written direction from both sides
• A court order is obtained
• The trust account holder initiates an interpleader motion, asking the court to decide

In most cases, one party refuses to sign the release—usually because they intend to pursue or defend a legal claim.

Key Factors Courts Consider

When the dispute ends up in litigation, courts focus on several questions:

• Who breached the contract? Did one party fail to close without justification?
• Were there any waived or unmet conditions?
• Was there a valid reason to terminate the deal?
• Did the seller mitigate damages (i.e., try to re-sell the property)?
• Is the deposit proportionate to the damages claimed?

The outcome depends on contract terms, timelines, market conditions, and whether the deposit was meant to be forfeited automatically or treated as part of a broader damages claim.

Partial or Full Recovery?

In some cases, the deposit is partially returned if the court finds that neither party was entirely at fault or if the losses were less than the deposit. In others, the deposit may be forfeited entirely—even without full damages being proven—if the contract clearly treats it as liquidated damages. The exact treatment depends heavily on the contract wording and the surrounding facts.

Final Thought

Deposit disputes are rarely black and white. They sit at the intersection of contract law, real estate practices, and litigation strategy. For buyers and sellers alike, understanding how courts view deposits—and why they may not be returned automatically—is essential in managing expectations and responding effectively when a deal fails.