Deposit for purchase of a warehouse was $750,000 on a $10,225,000 purchase price. The purchaser failed to close and the vendor, without demonstrating any damages, elected to take the deposit. Purchaser relied on section 98 of the Courts of Justice Act that would allow a court to grant relief against penalties and forfeitures on such terms as are just. The court had to first determine whether the forfeited deposit was out of all proportion to the damages and whether it would be unconscionable for the seller to retain the deposit. In this case, the first test was satisfied; there were no damages. Since there was no gross disproportionality in the size of the deposit, the court had to consider other factors for unconscionability. Factors include: inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties. In this case there was no unconscionability; it was a straightforward real estate transaction with no inequality of bargaining power, no fiduciary relationship, and to sophisticated parties. Deposits between 7% and 20% had been held appropriate; in this case the deposit was only 7%. The deposit was forfeited in full.
Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.