Do Sellers Get the Deposit if a Buyer Defaults?

 

One of the biggest misconceptions in Ontario real estate — especially in the GTA and Toronto — is that if a buyer defaults, the seller automatically gets to keep the deposit cheque.

The reality is more complicated. Deposits are not automatically released to the seller. In fact, there are specific steps, agreements, and sometimes even court involvement before that money changes hands.

Here’s what every homeowner should know.

What Is the Deposit?

In Toronto, where bidding wars and competitive offers are common, deposits are usually significant — often 5% of the purchase price. On a $1M home, that’s $50,000 held in trust (typically by the listing brokerage) once the Agreement of Purchase and Sale (APS) is signed.

That money isn’t simply sitting in the seller’s account. It remains in trust until one of three things happens:

- the deal closes,
- both parties sign a mutual release, or
- a court orders where the deposit goes.

Default vs. Conditions

If a buyer walks away before conditions are fulfilled (financing, inspection, etc.), they’re generally entitled to get their deposit back.

“Default” only comes into play when a buyer fails to close after those conditions are removed or waived. That’s when the question of whether the seller can keep the deposit arises.

Do Sellers Automatically Get the Deposit in a Default?

The short answer: no. Here’s why:

1. The deposit remains in trust until both parties agree (mutual release) or a court intervenes.

2. Even if the buyer clearly defaults, the seller cannot unilaterally grab the money.

A Real Toronto Example

Imagine this:
- A downtown Toronto condo listed for $900,000 receives an offer with a $45,000 deposit.
- The buyer waives their financing condition after five days.
- On closing day, the buyer’s lender pulls out last minute. The buyer can’t fund the deal.

The seller is left in limbo. The deposit is sitting in the brokerage’s trust account.

Here’s what happens next:
- The seller’s lawyer demands release of the deposit.
- The buyer refuses, claiming they had financing issues outside their control.
- Without a signed mutual release, the brokerage cannot release the $45,000 to either party.
-The case may go to court, where a judge decides not only about the deposit, but also whether the seller is entitled to additional damages (for example, if the condo resells later for $875,000 instead of $900,000).

This illustrates why sellers in Ontario can’t assume they’ll automatically pocket a deposit after a default. It’s a process — and often a legal one.

Key Takeaways for Sellers

- Deposits aren’t automatic: they remain in trust until released.
- Legal advice is crucial: default situations almost always require lawyer involvement.
- Damages may exceed the deposit: if your resale price ends up lower, you can potentially claim the difference from the buyer.
- Documentation matters: keep detailed records of timelines, communications, and attempts to resell.

Final Thoughts

Every situation is unique and if you’re ever in this position, the smartest step is to consult your real estate lawyer immediately — and lean on your realtor to guide the next move with a clear strategy.