Deposits Guidelines

• Guidelines

  BCFSA’s Guidelines provide a practical application of the information and give suggested best practice guidance to assist real estate professionals. These guidelines provide BCFSA’s interpretation of the Real Estate Services Act (“RESA”) and all other applicable legislation.

  In addition, BCFSA’s Guidelines may be a useful information source for the general public looking for information about standards of conduct for real estate professionals.

Purpose

This Guideline explains how deposits must be treated when they are received in respect of any real estate services being provided, what to do when deposits need to be returned to a party to a trade in real estate, and how to minimize the risks associated with deposits.

1. Understanding the need for a deposit;
2. Dealing with a deposit not held under RESA;
3. Identifying the risks of cash deposits;
4. Explaining deposit amounts to your clients;
5. Understanding how deposits can be released;
6. How to deal with a deposit if a contract is rescinded under the Property Law Act.

Guidelines

Understanding the Need for a Deposit

Contract law does not require that there be a deposit to create a binding contract of purchase and sale. The requirement that a contract include some form of consideration is satisfied by the mutual exchange of promises by the seller, buyer or lessee/lessor of a commercial property.

Some real estate professionals draft offers that do not provide for any deposit to be paid until after waiver of fulfillment of conditions (commonly referred to as “subject removal”). One reason may be a concern that the seller will not authorize the release of the deposit to the buyer if the buyer does not remove the subject clauses.

You should be aware that some consumers are under the misconception that a contract of purchase and sale is not binding on the parties until all subjects have been removed. The obligations under a contract are created once there has been an offer and acceptance (including any counteroffers). Some buyers believe that not including a deposit makes it easier for them not to proceed, if they choose, with their obligations under the contract.

If you are representing a buyer, you should caution them that, by not providing an initial deposit, they have not diminished their responsibility to make best efforts to satisfy the terms and conditions of the contract and to remove subject clauses.

If you are representing a seller, and a buyer presents an offer with no deposit until removal of subject clauses, you should discuss with your seller client the risks of not receiving a deposit when the offer is accepted instead of waiting for subject removal. These risks could include difficulties in collecting the rescission fee, equal to 0.25% of the purchase price, should the buyer exercise their right to rescind within the Home Buyer Rescission Period as permitted under the Property Law Act. Increasing a deposit or requiring a deposit before subject removal can be accomplished by way of a counteroffer from the seller.

Dealing with a Deposit Not Held Under RESA

If the parties to a trade in real estate agree that one of the parties’ lawyers, a notary public, accountant, or anyone that the parties mutually agree upon, is to receive the deposit then this agreement should be detailed in the contract of purchase and sale. If you receive cash from a client to deliver to the third party, a separate written agreement relieving you and your brokerage of your obligation to deposit the funds into the brokerage trust account is needed.

To protect your clients, you must explain the risks associated with those not governed under RESA holding the funds. Such risks may include that if a party to the trade holds the funds, there are few protections outside of litigation. This is also true if a buyer exercises their right to rescind the contract within the Home Buyer Rescission Period, as permitted under the Property Law Act, as it may be difficult to collect the associated rescission fee. Lawyers will usually hold deposit funds in trust, and developers must hold the funds in accordance with REDMA, which both offer protections for your client.

It is prudent to discuss with your client the potential options, benefits and risks relating to deposits at the outset of your agency relationship. Informing them of the differences between deposits submitted under RESA and REDMA will allow your client to make an informed decision when they enter into a trade agreement with another party.

BCFSA recommends that you advise clients to obtain legal advice when a deposit is going to be held by a party other than a real estate brokerage, including by one of the parties to the transaction.

You should confirm such a recommendation to the seller or buyer by inserting a clause into the contract of purchase and sale.

Identifying the Risks of Cash Deposits

Cash deposits, regardless of their size, can pose problems. RESA requires that all monies you receive in relation to real estate services must be promptly paid or delivered to your brokerage and the brokerage must promptly deposit the funds into a brokerage trust account. It is recommended that your brokerage issue a receipt for each cash deposit and keep a copy of the receipt as proof to mitigate any risks.

BCFSA has observed situations where real estate professionals have deposited cash deposits into their own personal bank accounts, then transferred these funds into their brokerage’s trust bank account or had a bank draft payable to the brokerage drawn on these funds. While the intention may have been to reduce the risk of loss or theft, this is not an acceptable practice. As an individual real estate professional, unless you are a sole proprietor, your bank account is not a trust account and is therefore not protected from creditors.

If a buyer insists on providing a cash deposit in conjunction with an offer to purchase and this is taking place after regular office or bank hours, it may be advisable to make the deposit payable within a certain time period after acceptance, coinciding with when your brokerage’s financial institution is open. This would facilitate your brokerage not receiving the cash until it can immediately be deposited. Alternatively, it could be suggested that the buyer obtain a bank draft, made payable to the brokerage, from his or her own financial institution.

Your brokerage may also have policies on the types of deposits it is willing accept. This may include cash deposits or electronic deposits. Discussing the types of deposits your brokerage can accept at the outset of your agency relationship will ensure there will be no frustration or confusion at the time an offer is being negotiated.

When dealing with large or suspicious cash deposits, reporting to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) may be required.

Read the Anti-Money Laundering Guidelines

Explaining Deposit Amounts to Your Clients

Many consumers believe that there is a standard percentage of an offer price that must be provided as a deposit when entering into a purchase of a property. You should explain to your client that there is no set amount that must be provided. It is best practice to help guide/educate your client with regards to an amount that you feel will help create a satisfactory offer for a seller. With the appropriate information, your client will be able to make an informed decision.

In most resale residential transactions, a single deposit is provided for under the purchase contract. Commercial transactions and pre-sale transactions (governed under REDMA) may include the requirement for multiple deposits. Ensure your buyer client is aware of the total amount owed as a deposit under the contract and the dates the payments must be made by.

For rental property management, the Residential Tenancy Act (“RTA”) outlines the maximum amount that can be held as a security and pet damage deposit. You must keep your landlord client informed of those amounts so they are aware of the cap on what can be held.

If a deposit to be held by your brokerage is not received in the time agreed upon by the parties, you must notify your managing broker immediately and your managing broker must notify all parties in writing in a timely manner.

Understanding How Deposits Can be Released

(a) Trades in Real Estate Connect to a Purchase or Sale

All deposits held by a brokerage in respect of a purchase or sale of real estate are held as stakeholder. Under the stakeholder provision, as mentioned above, the funds are held for the benefit of both parties and not for one party or the other. Should a transaction not complete for any reason, despite what the contract of purchase and sale outlines, you must have all parties to the transaction sign an agreement before the deposit can be released. If the parties do not agree, they should seek legal advice. There is one exception to the requirement for a written release from both parties. This is if the buyer exercises their right to rescission under the Property Law Act. See Guideline 6, How to deal with a deposit if a contract is rescinded under the Property Law Act, below for more information about releasing deposits in the event of a rescission.

Please review the Trust Guideline for how your brokerage should handle deposits in trust when the parties do not agree on who it should be paid to. The funds may be paid into the Supreme Court of B.C. in some circumstances.

(b) Rental Properties

Unlike deposits held in contemplation of a purchase or sale, security and pet deposits are held under the provisions of the Residential Tenancy Act. All deposits held by a rental property management brokerage are held for the benefit of the landlord client and never the tenant. This means that when a landlord requests that a deposit be paid out to them for reasons permitted under the RTA, even if the tenant disagrees, the brokerage may pay the funds to the landlord. A tenant would need to contact the Residential Tenancy Branch and or seek legal advice to help resolve their dispute.

It is important to ensure you are familiar with the rules outlined in the RTA when handling rental deposits.

Read more about trust accounts

How to Deal with a Deposit if a Contract is Rescinded Under the Property Law Act

If your brokerage is holding a deposit under a contract of purchase and sale that has been rescinded pursuant to Section 42 of the Property Law Act, the release requirements for that deposit are different than when a contract collapses for other reasons. Typically, brokerages are required to obtain a written agreement from both the buyer and seller in order to release a deposit being held as stakeholder; however, in an instance where a buyer has exercised their right to rescission in accordance with the Home Buyer Rescission Period Regulation (“HBRP Regulation”) no written agreement is required. The brokerage must release the rescission fee to the seller and return the remainder of the deposit (if any) to the buyer.

If a buyer indicates that they have rescinded the contract of purchase and sale, as the buyer’s agent, you must ensure that a valid, written notice of rescission has been served on the seller as set out in the Property Law Act and the HBRP Regulation. The buyer may have provided this notice directly to the seller without your involvement, so it is important for you to have a conversation with your client to ensure the notice was served correctly and, if possible, obtain a copy of the rescission notice. If you were involved with assisting your client with the notice, then you must retain a copy of the notice and provide it to your brokerage.

It is important to speak to your clients about the rescission period and explain to them that even if the contract of purchase and sale provides for a different arrangement with respect to a deposit (e.g., non-refundable) that the brokerage cannot abide by the terms of the contract and must release the rescission fee to the seller with the remainder of the deposit going back to the buyer. You should ensure that you speak to your clients about the difficulties that could arise in paying and collecting a rescission fee if the brokerage is not holding a deposit, and that they should seek legal advice should any issues arise.

Relevant Cases

Case #1: Managing Broker Permitted Brokerage to Release Buyer’s Deposit Without Written Agreement of the Buyer and the Seller

The managing broker supervised a real estate professional who listed a property for sale that was subject to the “owner builder” provisions of the Homeowner Protection Act. Under that Act and its Regulations, an owner must not sell a home unless the Owner Builder Disclosure Notice has been provided to a person offering to purchase the home. After the buyer and seller entered into a contract of purchase and sale in respect of the property, the buyer’s conveyancing lawyer contacted the managing broker to advise that the Homeowner Protection Office had advised him that the property may not be offered for sale without the owner providing an Owner Builder Disclosure Notice to a prospective buyer stating whether the property is covered by home warranty insurance. The buyer’s lawyer further stated to the managing broker that based upon this information, the buyer considered the contract void, and he requested the return of the buyer’s deposit. Based upon the buyer’s lawyer’s advice that the sale was void due to the seller’s non-compliance with the Homeowner Protection Act and the threat of legal action, the brokerage issued a cheque payable to the buyer’s lawyer, returning a portion of the buyer’s deposit. Subsequently, the brokerage issued another cheque payable to the buyer’s lawyer returning the balance of the buyer’s deposit. Both cheques were signed by the managing broker. The deposit funds were withdrawn from the brokerage’s trust account without the written consent of the buyer and the seller.

The managing broker was found to have permitted the brokerage to release the buyer’s deposit, which was being held in trust by the brokerage as a stakeholder (pursuant to Section 28(2) of the RESA), without the written agreement of the buyer and the seller.

Contraventions: Section 28(2) [Circumstances in which brokerage holds money as stakeholder] of the RESA, among others.

Read the full case

Case #2: Managing Broker Failed to Notify Sellers in Writing That Deposit Was Not Received

The managing broker supervised a real estate professional who was an owner of the brokerage. The real estate professional, acting as a limited dual agent, failed to notify the sellers of a property in writing after two of the buyer’s deposit cheques were either refused due to insufficient funds or never received by the brokerage. The managing broker only became actively involved in the transaction when a dispute arose between the sellers and the real estate professional over the return of commissions paid to the brokerage and the real estate professional. Prior to that time, the real estate professional had only advised her managing broker about the errant deposits. Although the managing broker then told the real estate professional to notify the sellers in writing, the managing broker failed to follow up with the real estate professional to ensure she had done so. The managing broker’s lack of knowledge was largely attributable to the fact that he had no control over the brokerage’s bank accounts.

The managing broker’s breaches could have been classified as technical in nature, in that all the parties were aware of the issues with the deposits. However, this did not excuse the managing broker’s obligations under RESA or the Real Estate Services Rules (“Rules”).

The Discipline Hearing Committee found that it was incumbent upon the managing broker to ensure that he obtained signing authority with respect to the brokerage’s accounts. He should have been aware of any deposit not coming into the brokerage and aware of the steps that the brokerage needed to take with late or no-show deposits. He could not be precluded or excused from his obligations and responsibilities under the Act simply by virtue of the difficulties of managing a “rogue” owner. Instead, the managing broker should have ensured that those appropriate steps had been taken by either him or by the real estate professional.

Contraventions: Section 28 [Circumstances in which brokerage holds money as stakeholder] of RESA and section [Notice to parties respecting deposits] of the Rules.

Read the full case

Managing Broker Considerations

As a managing broker, there are a number of obligations you must be aware of relating to deposits and trust accounts.

(a) Notice to Parties Respecting Deposits

Deposits held by the brokerage in contemplation of a trade in real estate are not held for the benefit of one party or the other as they are stakeholder funds unless received under provisions of the RTA. The funds must immediately be deposited into the brokerage trust account. Should the deposit not be received, you must notify all parties to the trade in writing. This also applies if a deposit cheque is not honoured by your financial institution.

(b) Third Party to Hold Deposits

In some cases, the parties to the trade will request that someone not governed under RESA hold the deposit. In such a case, your real estate professionals may be asked to provide the deposit to that third party. This is permissible as long as the deposit is promptly delivered to whomever is holding the funds and as long as the agreement has been executed by all parties to the trade citing who will hold the deposit. This added agreement is only required for cash deposits and not for cheques, bank drafts or money orders made out to the third party.

(c) Cash Deposits

Cash deposits are not common in sales transactions, but they may be used to pay rent, pet damage, or security deposits in rental property management, strata fees, special levies, interest payments and fines for strata management. Brokerages should develop a company policy with respect to dealing with cash deposits such as issuing receipts for cash payments and keeping copies in the brokerage file. Brokerages should also include what actions are to be taken if a cash deposit is received after business hours. This policy should include strategies to reduce the risk of loss or theft. Brokerages may wish to encourage non-cash forms of payment such as cheques, bank drafts or electronic transfers. For large cash deposits of over $10,000, FINTRAC reporting is required (with some exceptions for rental property and strata management).

Please read the Anti-Money Laundering (“AML”) Guideline for more information.

(d) Withdrawal from Trust

Should a deal collapse and one party requests the brokerage release the deposit to them per the contract of purchase and sale, or commercial lease, the brokerage requires an agreement to be signed by all parties agreeing to the payment of the deposit. Often, while the parties may agree in principle as to what will happen to the deposit, if either party breaches the contract, a dispute may arise when the transaction collapses. For this reason, unless an agreement is signed, should a dispute arise, the funds would have to be retained by the brokerage or the brokerage could make an application to pay the deposit into court.

Read the Trusts Information

In an instance where your brokerage is holding a deposit and the buyer exercises their right to rescind under the Property Law Act, no written agreement is required to release the deposit. Under the HBRP Regulation, the brokerage must release the rescission fee of 0.25% of the purchase price to the seller and the remainder of the deposit to the buyer, even if the contract provides for a different arrangement (e.g., non-refundable deposit).

It is important that you ensure that a valid rescission notice has been served on the seller and, if possible, obtain a copy of the notice in the brokerage file. Recognize that depending on the method of delivery, the notice could take time to reach the seller (e.g., registered mail) and that you cannot release the deposit funds until the serving of the notice has been verified.

The HBRP Regulation states that if the contract is rescinded, the brokerage must release the funds promptly to the parties. If the funds have not yet cleared the brokerage’s trust account, it would be appropriate for you to wait until the funds have cleared; this would still be considered promptly releasing the funds.

When you are involved in a trade where the buyer has exercised their right to rescission, you must ensure that you retain the appropriate documents relating to this. For further information see the document retention regulatory information.

Applicable Section of RESA/Real Estate Services Regulation/Real Estate Services Rules

• Section 26, RESA, Obligation to maintain a trust account
• Section 27, RESA, Payment into trust account
• Section 28, RESA, Circumstance in which brokerage holds money as stakeholder

• Section 30, RESA, Withdrawals from trust account 
• Section 68, Real Estate Services Rules, Agreement to pay other than into brokerage trust account 
• Section 5, Home Buyer Rescission Period Regulation, Service of notice of rescission 
• Section 6, Home Buyer Rescission Period Regulation, Amount payable on rescission  

Definitions

Brokerage trust account: means, in relation to a brokerage, an account maintained by the brokerage under Section 26 [obligation to maintain trust account];

Foundation: means the Real Estate Foundation of British Columbia continued under Section 90 [foundation continued];

Foundation fund: means the fund of the foundation under Section 94 [foundation fund];

Stakeholder: means a brokerage holding money as a stakeholder under Section 28 [money held as stakeholder];

Trade in real estate: means

1. A transaction for the purchase or sale of real estate, for the leasing of real estate or for any other form of acquisition or disposition of real estate;
2. An assignment of a contract for purchase, sale or lease of real estate, or a transaction in relation to such an assignment; or
3. A prospective trade in real estate within the meaning of paragraph (a) or (b);

Client: means, in relation to a real estate professional, the principal who has engaged the real estate professional to provide real estate services to or on behalf of the principal;

Trust account: means, in relation to a brokerage;

1. a brokerage trust account maintained under section 26 [obligation to maintain trust account] of the Act; or
2. a commission trust account maintained under section 31 [payment of licensee remuneration] of the Act;

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