What is a Non-Refundable Deposit Agreement?
A non-refundable deposit agreement is a mutual arrangement, either verbal or written, in which one party pays a sum of money to another party in exchange for the right to keep that money regardless of whether the services are effective. Non-refundable deposits are most commonly used in the real estate field for earnest money deposits when purchasing a home, however, there are many other businesses that require a non-refundable deposit. Non-refundable deposits, when based on good business practices, protect businesses from having to deal with customers who have changed their minds, do not follow through with the purchase, or cancel contracted services. Some examples of common non-refundable deposit agreements are event planning services, hotel accommodations, and travel arrangements .
There are a few main components to a non-refundable deposit agreement. First, is a description of the services being provided by the provider (real estate agent, event planner, or designer). Second, is a description of the services the consumer is agreeing to pay for (venue signs, catering, or printing). Finally, a payment schedule by which the consumer agrees to pay, as well as the deadlines for all payments. In addition to the above components, a non-refundable deposit agreement is often a document separate from any other sales agreement. This allows the provider to leave the door open for a consumer to back out of the larger sale without suffering any consequence by cancelling their initial contract. The language in the smaller non-refundable deposit agreement may also be less formal than what might be in a larger sales contract.
Non-Refundable Deposit Agreements and the Law
A legally enforceable Non-Refundable Deposit Agreement must be different from any other agreement between a customer and business. The Courts have looked at non-refundable deposits which are defined as a sum of money forfeited by the purchaser of a product or service to the supplier, and have said that if there is no reasonable connection between the forfeited deposit and the costs incurred by the supplier, the clause is not enforceable as a penalty. What this means in plain English is that a business owner cannot just take a non-refundable deposit from a customer for the sake of it and then call it non-refundable – if they are ever taken to court the means of accommodating the aforementioned fairness will be examined. In other words, if you are a supplier receiving a non-refundable deposit, you are going to have to show that the penalty you are taking from the customer accurately reflects the expenses you are likely to incur as a result of the non-completion of a customer’s order. The amount taken must be a genuine pre-estimate of the loss you will suffer and not amount to a punishment to the buyer for changing their mind or deciding not to trade with you. Where the deposit will be forfeited also adds another element to the mix. The main hurdle comes when you as a business may just want to have a non-refundable deposit for certain products or services. You could do this by getting the customer to acknowledge that they have seen a list of the items or classes of item for which a non-refundable deposit will be demanded. You should be careful and state clearly that this applies to all future non-refundable deposits as well. However, in practice you are better off having separate agreements that are made in respect of specific transactions. This way, a deposit with clear terms attached can be paid and either the deposit or the Agreement can be relied on later and a claim for forfeiture of the deposit or damages can be made through the courts if not returned in line with those conditions.
The Necessity of Non-Refundable Deposits
Businesses and individuals may elect to utilize non-refundable deposits for a variety of reasons:
First, when a customer places a non-refundable deposit with a business, that deposit acts as a form of security. It secures the business’s potential loss of revenue associated with the possibility that the purchaser may change its mind at a later time. It assures that the purchaser is a serious buyer, and has a corresponding stake in the transaction. It allows the business some peace of mind, it takes the edge off the reliance upon the honesty and good faith of the purchaser.
Second, the term non-refundable deposit signals to a potential purchaser that 1) there is a potential risk for the purchaser should they decide to change their mind about the purchase after they have made the deposit and 2) that the business has taken steps to protect itself in the event that the purchaser backs out of the transaction. The deposit provides the purchaser with actual notice of potential consequences should the agreement be cancelled or defaulted upon, and by providing actual notice, the business protects itself from the risk of fraud or misrepresentation. An intentional misrepresentation or an intentional inaccurate statement regarding the nature of a deposit may expose the business to liability. The purchaser who is cautioned about the potential consequences of a non-refundable deposit is less likely to lie or mislead the business, or the potential purchaser.
Third, non-refundable deposits are more easily defined and declared than "deposits." The term non-refundable is easily understood and is generally on its face, well understood. On the other hand, "deposit" is a vague term that can mean a reservation (in the real estate context), a good faith deposit (in the purchase context), or a security deposit (in the lease context). In the purchase agreement context, a "security deposit" might raise an entirely new layer of legal concern. The term, "non-refundable deposit," eliminates any doubt or ambiguity and sets forth the parties’ intent clearly.
Fourth, in the event that there is a dispute between the business and the purchaser regarding the disposition of the deposit, it will be much easier to prove the parties’ intent in legal proceeding because of the clarity of the term non-refundable deposit. In a legal proceeding it will be easier to prove that the parties intended the deposit to be non-refundable, and as such it will be easier to recover the deposit amount.
Industries that Commonly Use Non-Refundable Deposits
Non-refundable deposits are most commonly found in the service industry. They help cover the cost of the materials and labor needed to perform frequently complicated projects. The personal services industry or, more commonly known as, service industries, traditionally utilize non-refundable deposit agreements regularly.
This is particularly true for businesses that provide services not performed in a physical location. Caterers, vendors, entertainers, builders, and even doctors make extensive use of non-refundable deposits to offset the costs of preparation, materials, and manpower for the specific project a client may hire them for.
For example, if an engineer is hired to survey a piece of property and prepare the target design for the construction of a new building, he will require certain information. He will need copies of property lines, elevations, location of current utilities, and other research to determine best how to design the property. If the engineer is required to produce a computer model and drawings of the new site (as would usually be the case), this information must be gathered in advance.
Sometimes companies will simply absorb these costs as standard business practices, particularly if these agreements are common in their industry. However, when it comes to a non-refundable deposit, the cost is usually passed on to the customer or client. After all, engineers also have to pay employees and contractors for their work. Their cost of doing business is paid for by having clients pay deposits to cover the up-front cost of creating blueprints.
In short, non-refundable deposits are simply a way of ensuring the up-front costs of doing business are safeguarded. Most businesses that require an advance deposit do so because they would need to hire additional help or extra manpower to complete a job—a job for which they would have to spend significant time and effort performing research and planning. Any change or cancellation of that request therefore reflects a loss on their part, which they aren’t prepared to assume.
In terms of customer service, it is most likely that a non-refundable deposit comes as a surprise to a new customer. However, particularly for companies that perform architectural work, acquisitions of property, travel, planning or design, engineering, contracting, or other similar fields, non-refundable deposits are a regular business practice. Most people in those industries use non-refundable deposit contracts.
Composing a Non-Refundable Deposit Agreement
Whether using a deposit to hold a condominium, an event venue, a home inspector to inspect the home, etc., a non-refundable deposit contract is one that is promising to pay the deposit regardless of any alleged breach made by the other party. The elements of a non-refundable deposit contract are: (1) a deposit, (2) an offer that the deposit will be forfeited if a subsequent promise is broken, (3) acceptance and (4) performance. If any one of the above elements is missing, there is no contract.
Careful consideration should be given to the language because of the potential ramifications to both parties. The agreement must be very clear in its intention that the deposit is not refundable under any circumstances.
There are two steps when drafting a non-refundable deposit contract:
Step 1. Draft the contract with the essential elements and be prepared to waive other obligations of the parties in order to enforce the deposit contract.
Step 2. Understand the legal effect, and benefits and drawbacks, of waivers in that contract.
A recent U.S. District Court case, Amariek, LLC v W.G. Telcom, Inc., highlighted some of the issues with waivers and limitations of liability. There , a telecommunications company made an agreement to lease a facility from a real estate company and consented to a "waiver of jury trial with respect to any litigation commenced in relation to the transaction." The telecommunications company later sued in court, alleging a breach of contract. The real estate company replied that the telecommunications company agreed to a waiver of jury trial and sought dismissal.
The telecommunications company initially refused to dismiss its jury demand, stating that under the statute of frauds, the waiver was unenforceable because the rental agreement was not in writing. The real estate company argued that because it was the telecommunications company’s RJN to provide the written document, it should be estopped from objecting to it.
The U.S. District Court at New Orleans sided with the real estate company and ruled that simply permitting the telecommunications company to abolish the waiver would impose an unfairness on the real estate company.
Although waivers are not absolute, care should be taken to include them in an enforceable way in non-refundable deposit agreements.
How to Handle Disputes on Deposit Agreements
Disputes over a nonrefundable deposit may arise between the tenant and landlord or property manager. A dispute could also arise between a landlord or management company and a third-party service provider. Some may even arise between the tenant and the third party, such as a staged/furnished apartment owner, or handyman services.
In many instances, you may be able to resolve the dispute without litigation if you are able to apply a rational approach involving common sense, coupled with a little bit of psychology. For instance, if you are dealing with a dispute with the landlord, you may want to share with the landlord or the property management company your views on how your deposit should be applied or refunded. Many disputes do not have to be expensive to resolve. In fact, some are easily resolved without any expense other than your time. An example of a common sense approach that might resolve a dispute with a landlord arises in situations where a tenant expects for the deposit to cover some repair or maintenance work. You may want to directly discuss the issue with the landlord and find out from the landlord why the payment has not yet been made.
If the dispute cannot be resolved directly with the property management company or owner of the building, you may want to consider the following strategies:
•Ask the company to re-evaluate the issue, and consider an appeal to the regional manager.
•If you are still not satisfied and wish to fight the decision, ask the company to communicate with you in writing.
•If you still cannot get the company to agree, seek legal assistance.
If the company is not a Residential Tenancy Branch-regulated business, then the issue may be resolved in Counters and Small Claims. However, if it is a Residential Tenancy Branch business, it may be worth pursuing action in the RTB directly.
Alternatives to Non-Refundable Deposits
Of course, non-refundable agreements are hardly the only option. Two other alternatives worth discussing include: (i) non-refundable payments and (ii) no deposit at all. While no written contract would be necessary in the latter case, as discussed below, it might be a good idea for other reasons.
Sometimes buyers will pay a non-refundable payment up front that is separate from the purchase price. This approach can have a number of advantages as compared with a non-refundable purchase price. Given that the buyer would not be paying for anything at closing other than the non-refundable portion, a non-refundable payment would be less of a burden than a non-refundable purchase price. Moreover, if the parties ever had to argue about it, a court would find it easier to determine whether a non-refundable payment was appropriate in the circumstances than a non-refundable purchase price. As mentioned above, a buyer’s agreement to pay the full purchase price at closing if it is unhappy with the parcel may seem unreasonable, but a seller’s agreement to accept less than full price does not seem unreasonable.
Another alternative is to require neither a non-refundable payment nor a non-refundable purchase price. While this might sound like a good approach, there are two reasons why it is not necessarily the best option. The first concerns forfeiture. It is important for an owner to secure a payment or some other benefit in the event that the buyer fails to fulfill the buyer’s obligations under the contract. The forfeiture doctrine allows the granting of a down payment to the seller upon breach. However, if the seller has already received the entire purchase price — including over encouragement of the progress of the contract — the forfeiture doctrine does not apply . As mentioned above, the remedies available to an owner to offset the harm caused by a buyer’s breach may not always be sufficient in the circumstances of a deal gone bad.
The second reason why requiring neither non-refundable payment nor non-refundable purchase price is not the best option concerns investment. Sometimes an owner owns property as an investment and hopes to sell it one day while making money. If a deal comes along which will not be necessarily more profitable than the one in question, but which will cost the owner less money now, it could be fantastic for the owner to save money toward the end goal of getting paid.
Of course, non-refundable agreements can be — and regularly are — criticized. As stated above, they are sometimes thought to unduly burden buyers. Also, public policy forbids non-refundable agreements that sanction breaches. If a buyer pays a non-refundable purchase price and the seller collects it whether he closes or not, the seller has no incentive to be fair or reasonable. In the face of objection, an enforcement decision arguably comes down to whether a court is more likely to regard a non-refundable agreement as a bargain voluntarily entered into by sophisticated businesspeople or as an unfair and inequitable forfeiture. Also, a court might be more likely to see a seller simultaneously (i) take a full non-refundable payment and (ii) sue the buyer for breach of contract when it is not actually hurt by the breach.
So, are there any good alternatives to non-refundable agreements? Depending on the circumstances, the answer is yes. Non-refundable payments are an excellent alternative but not the only one. Requiring neither non-refundable payment nor non-refundable purchase price similarly might be an option. The alternatives, however, are not without their own drawbacks.