When a transaction fails to close without any acceptable justification, it is generally accepted that the purchaser's deposit is forfeited. The Ontario Court of Appeal has recently considered the circumstances in which the court's equitable jurisdiction may be exercised to reduce the amount forfeited. In Redstone Enterprises Ltd v Simple Technology Inc, the parties had negotiated the purchase and sale of a warehouse in Brantford, which the buyer wanted for purposes of establishing a legal and licensed grow-op. The agreed purchase price was over $10 million, and the original deposit was $100,000 (later increased to $200,000 when the buyer waived conditions). Due to issues in obtaining the license, the buyer requested an extension of the closing date, and offered a further deposit of $450,000. Ultimately, the buyer was unable to obtain either a license or financing, and the transaction failed to close.
The application judge granted relief from forfeiture on the basis that the amount of the total deposit was so large as to render complete forfeiture unconscionable. The Court of Appeal disagreed, despite the fact that the seller suffered no damages as a result of the failure to close. The Court emphasized the importance of freedom of contract, and held that a finding of unconscionability must be exceptional, strongly compelled on the facts of the case. While there could be a case in which the amount of the deposit alone would be so disproportional as to be unconscionable, this $750,000 deposit did not reach that threshold (although the Court did not set a threshold, it noted that 10% is customary, and the deposit here was 7%). Other than quantum, other indicia of unconscionability include inequality of bargaining power, a substantially unfair bargain, the existence of bona fide negotiations and the gravity of the breach. There were no such indicia in this case, such that there was no basis on which to reduce the amount of the forfeited deposit.
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