$15 Million down the drain? The questions you should ask about your deposit.
A developing case out of Toronto is making home purchasers ask questions about what is really happening to their funds when they are entering into real estate transactions. It is estimated that almost $15 million was paid into a lawyer’s trust account, and alleged that she went and released the funds into the account of the developer.
The Condominium Property Act in Ontario specifically states that the deposits are held in trust either by a lawyer or a number of non-lawyer escrow agents. The deposits were paid in to the lawyer, but from all reports it appeared she released them. The project was abandoned, and the purchasers went looking for their money, and discovered it was gone.
It is important to note that this provision does not exist in the Condominium Property Act for Saskatchewan and it is common that individuals will have paid their deposits directly to the developer on the project. You should discuss with your lawyer the risks associated with payment directly to a vendor in this circumstance.
The new home warranty protection in Saskatchewan will also have some specific deposit protection. For example, there is $25,000 protection on deposit under the New Home Warranty Protection of Saskatchewan (subject to their specific terms). Check it out here: http://www.nhwp.org/about/about-coverage.htm. You should check out the coverage associated with your specific project.
All funds under an accepted offer to purchase paid to real estate agents are paid into their brokerage’s trust under the terms of the Real Estate Act and Regulations. For funds paid to a real estate agent, there is deposit protection pursuant to the Real Estate Assurance Fund. The details on the Fund are located here: http://www.srec.ca/coninforeaf.asp. However, it is important to note that coverage is limited to $25,000 for a single occurrence, and $50,000 for the aggregate claims against a brokerage. Accordingly, if a whole brokerage goes under, and they were dealing with a large development, the pro-rated settlement for this coverage could be pennies on the dollar through this fund. This is likely more useful for one off problems with individual agents/brokerage that made errors in the release of trust funds.
Beyond that there would be potential for claims to be made behind the professionals or entities that were responsible for handling the funds and holding them in trust, and their insurers. All of which takes additional time and energy to pursue, and they may be underinsured for the value of the transaction.
As a home buyer, you should be asking questions about how your deposit is going to be maintained and released:
(1) Who is going to hold the deposit? Is it the real estate brokerage? The lawyer? The vendor? The developer?
(2) When are the funds going to be released to the vendor? Who is able to authorize their release?
(3) What happens if there is a problem? What happens if the vendor disputes that there is a problem? Which party or third party gets to decide what happens to the money?
