What Happens to the Deposit When a Buyer Can't Close in Durham Region Real Estate? Buyer Cannot Close? What Happens to the Deposit in Ontario (2026 Guide for Durham Region).

Purchasing a home is a major milestone, but a shifting real estate market has introduced significant financial risks for buyers and sellers alike. Today, a growing number of real estate transactions across the Greater Toronto Area (GTA; Scarborough, Toronto) and Durham Region (Pickering, Ajax, Whitby, Oshawa, Clarington) are facing closing complications.

Whether due to unexpected mortgage rejections, low bank appraisals, or sudden financial changes, a failed closing triggers immediate legal chaos.

If you are involved in a real estate transaction that is falling apart, the most urgent question on your mind is likely: What happens to the deposit when a buyer cannot close?

Below, our real estate legal team breaks down the legal realities of failed real estate transactions in Ontario, how deposits are handled, and what you must do immediately to protect your financial interests.

Deposit implications in Durham Region home sales

What Happens When a Real Estate Deal Collapses in Ontario?

When a buyer signs an Agreement of Purchase and Sale (APS) and it becomes firm, they are legally bound to complete the transaction on the scheduled closing date. If the closing date arrives and the buyer fails to deliver the required funds, the transaction is in default.

However, a collapsed deal does not mean the deposit money is automatically handed over to the seller.

The Mutual Consent Rule for Trust Accounts

In Ontario, when a buyer submits a deposit, the funds are typically held in a real estate brokerage’s registered trust account. By law (under Ontario's Trust in Real Estate Services Act framework) , the brokerage cannot release these funds to either the buyer or the seller unless one of two things happens:

1. Both the buyer and the seller sign a standard Mutual Release form agreeing exactly on how the money will be distributed.

2. An Ontario court issues a legal order directing the brokerage to release the funds.

If a dispute arises and neither side agrees to sign a release, the deposit remains entirely frozen in the trust account until a judge rules on the matter.

Why Buyers Fail to Close in Durham Region

Several reasons can cause a buyer to fail to close on a property, including:

• Mortgage rejection: Lenders may deny financing due to changes in the buyer’s credit or income.

• Low appraisal: The bank’s appraisal may come in below the purchase price, affecting loan approval.

• Sudden financial hardship: Job loss, unexpected expenses, or other financial changes can prevent buyers from completing the purchase.

• Title or legal issues: Problems with the property title or unresolved liens can delay or cancel closing.

• Buyer’s change of mind: Sometimes buyers simply decide not to proceed.

  
  

Each of these scenarios can affect the deposit differently depending on the contract terms and Ontario law.

Young couple attentively discussing mortgage options with a bank representative.

What Ontario Law Says About Deposits When Buyers Cannot Close

Who Gets to Keep the Deposit If a Buyer Backs Out? In Ontario, the deposit is generally considered part of the purchase price and is held in trust. If a buyer cannot close, the fate of the deposit depends on the circumstances and the contract:

• If the buyer defaults without a valid reason: The seller may be entitled to keep the deposit as compensation for lost time and opportunity.

• If the buyer cannot close due to a condition in the contract: For example, if the offer was conditional on financing and the buyer fails to secure a mortgage, the deposit is usually returned.

• If both parties agree to cancel: The deposit is returned or divided as agreed.

• If the seller defaults: The buyer can demand the deposit back and may seek damages.

  
  

The contract’s conditions and clauses play a critical role in determining what happens to the deposit.

As a general rule under Ontario real estate law, if a buyer defaults under a firm (ie. no outstanding conditions) Agreement of Purchase and Sale, the seller will generally be entitled to retain the deposit, subject to any court order and the specific terms of the agreement. This is known as a forfeiture of the deposit. Crucially, the seller does not always have to prove they suffered any actual financial loss to keep the deposit. Even if the seller turns around and sells the property to someone else for a higher price, Ontario courts have repeatedly held that a defaulting buyer will generally forfeit their deposit as security for performance of the contract, regardless of whether the seller ultimately suffers a loss.

Although uncommon, Ontario courts possess equitable jurisdiction to grant relief from forfeiture in certain circumstances. The court will consider factors such as the proportionality between the deposit and the seller's losses, the conduct of the parties, and whether retaining the entire deposit would be unconscionable. However, relief is granted only in limited cases and buyers should not assume they will recover any portion of their deposit after defaulting.

Conditions vs. Firm Offers

The legal outcome changes drastically depending on the wording of your contract:

• If the deal was conditional (e.g., conditional on financing or a home inspection) and the buyer made a genuine, good-faith effort but failed to meet the condition, the deal is null and void. In this scenario, the buyer is typically entitled to a full return of their deposit.

• If the deal was firm and all conditions were waived or fulfilled, financing difficulties alone will generally not excuse the buyer's failure to close. Backing out will almost certainly cost them their deposit.

The Lesson is: 1) to ensure all necessary conditions are added to the Agreement before signing and 2) to then pay attention to the timelines and 3) to actively conduct whatever due diligence is required within those timelines.

Can a Seller Sue for Damages Beyond the Deposit?

Yes. One of the most dangerous misconceptions for buyers in Ontario is believing that losing their deposit is the maximum penalty for walking away from a property.

If a buyer breaches the contract, the seller has the right to sue for actual financial damages to make themselves whole. If the seller’s total losses exceed the value of the deposit, the buyer can be held personally liable for the remaining balance. A better visual way to envision is the following:

[Total Liability] = [Original Purchase Price] - [New Resale Price] + [Carrying Costs / Damages]

Note that court-ordered damages frequently include:

• The Market Shortfall: If the market drops and the seller must resell the home for $80,000 less than the original agreed-upon price, the defaulting buyer is legally responsible for paying that $80,000 difference.

• Carrying Costs: Staging fees, property taxes, utilities, and extra mortgage interest payments incurred by the seller while searching for a new buyer.

• Damages: Reasonable cost relating to or flowing from the defaulting parties breach or failure to close. Such as moving expenses, storage, hotels, meals, etc.

• Legal Fees: A successful seller may also seek recovery of a portion of their legal costs through a court costs award. Although full (100%) reimbursement of legal fees is uncommon.

Children playing in new suburban neighborhood (Ajax, Pickering, Whitby, Oshawa, Clarington, Scarborough, Toronto)

Strategic Steps to Take Immediately

If your real estate transaction is at risk of collapsing anywhere in the Greater Toronto Area (GTA; Scarborough, Toronto) and Durham Region (Pickering, Ajax, Whitby, Oshawa, Clarington), taking the wrong step in the first 24 hours can cost you tens of thousands of dollars.

If You Are the Buyer:

1. Do Not Stop Communication: Instruct your real estate lawyer to formally request a closing extension from the seller’s legal team. Sellers are often willing to grant a brief extension if it means saving the deal.

2. Document Your Efforts: Keep clear records of your lending rejections, bank communications, and appraisal reports. This helps prove you acted in good faith.

3. Seek Legal Counsel Instantly: Do not sign a Mutual Release or a modified agreement without an independent legal review.

If You Are the Seller:

1. Formally Tender the Deal: In many cases, a seller's lawyer should ‘tender’ or otherwise establish that the seller was ready, willing, and able to close. Whether formal tender is required depends on the circumstances and should be discussed with legal counsel.

2. Mitigate Your Losses: You are legally required to try and minimize your financial damages. This means putting the property back on the market quickly and attempting to sell it for a fair market price. ie. the court instills a legal onus to ‘make lemonade out of lemons’ or the ‘best of a bad situation’;

3. Freeze the Deposit: Ensure your real estate law firm formally notifies the brokerage not to release the deposit funds until a legal agreement or court order is secured

Here is a comparison table to clearly outline some of the more common default scenarios and corresponding legal outcome and action required in each default scenario:

Scenario	Legal Outcome	Action Required
Buyer backs out - without conditions	Seller is usually entitled to the deposit as forfeiture.	Seller can sue for additional damages if the home resells for less.
Buyer backs out - with conditions (ie. financing condition fails)	Buyer is usually entitled to their deposit back.	Must prove they made a "good faith" effort to secure a mortgage.
Mutual agreement to abort	Deposit is split or returned based on negotiation.	Both parties must sign a standard Ontario Mutual Release form.

Real Estate Dispute Legal Services Across the GTA & Durham Region

Real estate transactions involve significant financial commitments and legally binding obligations. Whether you are buying, selling, refinancing, or facing unexpected closing challenges, obtaining timely legal advice can often prevent costly problems before they arise.

At LCO Law, we help buyers and sellers understand their rights, evaluate available options, and navigate closing issues with confidence. Our team provides practical, strategic guidance throughout the transaction process, including assistance with closing extensions, title issues, financing concerns, contract reviews, and successful transaction completion.

We proudly serve clients throughout:

• Ajax & Pickering

• Whitby & Oshawa

• Clarington & Bowmanville

• Scarborough & Toronto

Whether you are concerned about a potential closing delay, financing complications, deposit issues, or simply want to ensure your transaction proceeds smoothly, our experienced real estate lawyers can help you understand your options and protect your interests before a problem escalates.

Protect Your Investment Today

If you have concerns about an upcoming closing or need guidance regarding your real estate transaction, contact LCO Law today. Early legal advice can often help avoid costly mistakes and provide greater certainty during one of life's most significant investments. Contact the real estate legal team at LCO Law today to schedule a comprehensive review of your transaction.

• Website: lcolaw.ca

• Phone: (905) 683-2741

• Email / Contact Form: info@lcolaw.ca OR www.lcolaw.ca/contact