Can You Get Your Deposit Back if a Business Deal Fails in British Columbia?

You have signed a deal to buy a business and paid a deposit, and now the purchase looks like it will not close. The money at stake can be large, and it is natural to ask whether you can get it back.

The honest answer is that it depends on your contract and on why the deal is failing. This article explains the common factors, the one area where the Franchises Act gives specific rights, and what to do before you say or sign anything.

This article covers the law of British Columbia.

Start with what your agreement says

A deposit is money paid to show you are serious and to be applied to the price if the sale closes. What happens to it if the deal collapses is usually set out in the purchase agreement. Look for the clauses on the deposit, who holds it (often a lawyer or notary in trust), conditions, and default.

Courts look at the wording and the circumstances, so two similar deals can end differently. A lawyer can read your agreement and tell you where you stand.

Conditions and due diligence

Many business purchase agreements are subject to conditions that must be met or waived by a set date. Where a condition is not met and the agreement says the deposit is then returned, the buyer is often able to walk away and ask for it back. Where the buyer simply changes their mind, the result is usually different.

• Financing: the buyer obtaining the loan they need.
• Due diligence: satisfactory review of financial records, contracts, and other business information.
• Landlord consent: approval of the lease transfer.
• Licences and permits: for example, an expired liquor licence cannot be transferred, so renewal must be kept current before closing.
• Third-party approvals, such as a franchisor's approval.

Watch the deadlines. If a condition is meant to be removed or waived by a certain date, doing nothing or removing it in writing can change your rights.

When a seller may keep the deposit

A seller is more likely to keep a deposit if the buyer is in default, for example by refusing to close when all conditions have been met or waived. Whether a seller can keep it, and whether any amount beyond the deposit can be claimed, depends on the agreement and the facts. Disputes can end up in court, so keep records of everything.

Franchise purchases: specific rights under the Franchises Act

If you are buying a franchise, the Franchises Act can help. A prospective franchisee must receive the disclosure document at least 14 days before the earlier of signing a franchise agreement or related agreement, or paying consideration relating to the franchise. A franchise resale is a grant under the Act.

A franchisee may rescind within 60 days after receiving a disclosure document if it was late or deficient, and within 2 years of entering the franchise agreement if no disclosure document was provided. The franchisor must then refund money, buy back inventory, supplies and equipment, and compensate losses.

There is an exception. A franchisee granting a franchise for its own account is exempt from the disclosure requirement, but only if the grant is not effected by or through the franchisor. A franchisee who suffers a loss from a misrepresentation in the disclosure document, or from a failure to comply with section 5, also has a right of action for damages.

What to do next

• Find your purchase agreement and any amendments, and read the deposit and conditions clauses.
• Note every deadline for removing or waiving conditions.
• Find out who is holding the deposit and do not instruct release without advice.
• Put your concerns in writing and keep all emails and messages.
• Avoid signing a release or mutual termination until you understand its effect on the deposit.
• Speak to a lawyer promptly, as time limits may be short.

Frequently asked questions