In Depth

Deposit rules can leave would-be homebuyers out of pocket

A gap in provincial law means there is no easy way for homebuyers to get their deposits back when there is a dispute with the vendor — and real-estate companies benefit from the interest that accrues.

No mechanism other than court in case of disputes; interest from trust accounts goes to real estate companies

Deposit rules can leave would-be home purchasers out of pocket 7:12

When Alison Woolridge was moving back to Newfoundland from Toronto several years ago, she thought she'd found a home in St. John’s.

But her house inspection uncovered problems, and the deal fell through.

When it did, she asked her agent to get back the $1,000 deposit she had plunked down.

Alison Woolridge was surprised to learn what the law says about real-estate deposits when a deal falls through. (CBC)

And that's when the trouble began.

Both the vendor and buyer have to sign off before a deposit is returned.

In Woolridge's case, the other party wouldn't sign, leaving her frustrated.

"It seems wrong that there's not some kind of override," Woolridge said.

"If things are discovered in your inspection that are absolutely a deal-breaker, I would think then it should be a given you get your deposit back."

But that’s not the case.

A gap in provincial law means there is no easy way for homebuyers to get their deposits returned when there is a dispute with the vendor — and real-estate companies benefit from the interest that accrues.

Realtors say disputes rarely happen

Realtors say this rarely happens, but if it does, they can't do much about it.

Al Stacey, president of the Newfoundland and Labrador Association of Realtors, says his group has suggested rule changes that would allow deposits to be returned after a specified period of time. (CBC)

"It's no longer in the hands of the realtor, it’s no longer in the hands of the brokerage, it's no longer in the hands of the real estate association, it's a contractual relationship between the vendor and the purchaser," said Al Stacey, president of the Newfoundland and Labrador Association of Realtors.

"And so when it's there, unfortunately, the only advice I can give now is refer to the courts and get your money back."

But Woolridge says going to court is not an option worth pursuing for everyone.

"Here, $1,000, you may pay that going to court to get your $1,000 [deposit] back. It's not worth your while."

Provincial government looking at issue

Service NL Minister Nick McGrath says the Newfoundland and Labrador government is looking at the issue.

"The legislation is old and under review right now," McGrath said.

"But I think what that was there for was to protect both the seller and the buyer should something happen, go wrong, during the contract — which very rarely happens I might add."

Realtors think there should be changes.

"If a purchaser puts forward $500 in good faith to purchase, and let's say the deal falls through on financing, then they should have every right to have their money back," Stacey said.

Realtors have recommended the rule be changed so deposits would be returned after two to three months.

McGrath says the review of the legislation is currently at the consultation stage.

Real estate firms get interest

After three years of badgering her agent, Woolridge ultimately managed to get her money back.

But when she finally got her cheque, there was no interest paid.

Trust account totals

Below is the amount of money in the top 10 real estate trust accounts, as provided by Service NL.

The total amount reported to date is $3.9 million in accounts containing only deposits.

The province won’t release the names of those associated with specific accounts, citing commercial sensitivity provisions of access-to-information laws.

  • $1,378,963
  • $294,022
  • $260,990
  • $156,000
  • $146,208
  • $145,449
  • $142,017
  • $130,895
  • $117,205
  • $77,871

So, who got that cash?

By law, all deposits go into an interest-bearing trust account managed by individual real estate companies.

If a real estate deal is successful, the money goes towards the purchase of a home.

If the deposit is not returned — in the case of a dispute like that involving Woolridge — it sits there accruing interest to be used by real estate companies.

It wasn't always that way.

For 20 years, the interest went to a real estate foundation, to be used for education and training.

But the Tory government changed the law in 2006, abolishing that foundation.

Now the interest goes directly to real estate companies.

Woolridge finds that offensive.

"It's morally a bit corrupt, because you're not highly motivated to get me back my deposit, because if my deposit doesn't get back to me and it sits in your trust for years and years, you are pocketing the interest off that deposit," she said.

"So who's representing me, who's motivating you to get me back my deposit should my real estate transaction go wrong? Who's on the side of the buyer?"

Realtors say the rules are the rules.

Service NL Minister Nick McGrath says the legislation governing real-estate transactions is under review. (CBC)

"The brokerages are allowed to use the interest to pay for the expenses that come about as a result of complying with the government, so really we don't have a comment on whether it’s moral or amoral or whatever," Stacey said.

There is a lot of money in trust funds, and legislation requires the accounts to be regularly audited.

According to the government's most recent figures, there is $3.9 million held in trust.

The minister in charge says he’s not surprised by that number.

And while the rules are under review, McGrath there is no timeline for any potential changes.