When a buyer is taking over an existing tenant, we often see wording in the offer like: “seller will transfer security deposit to buyer.”

Buyers and sellers both think that the seller is going to write a cheque or EFT the security deposit directly to the buyer. That’s not how it usually happens. The seller's lawyer almost always gives the buyer a 'credit' (price reduction) on the statement of adjustments for the amount of the security deposit. That means the buyer is paying the purchase price less the amount of the security deposit.

It’s always a bit confusing for a buyer when they don't get the actual security deposit in their hands. So how does this work?

What to Do

When a purchase closes where a buyer gets a credit for a security deposit say of $1,500, first the buyer opens a security deposit trust account.

Under the Residential Tenancies Act, a new buyer landlord must maintain a trust account for security deposits. When they say 'trust account', they just mean a normal bank account that only deals with security deposits and nothing else. It doesn’t need to be specifically named 'trust account'.

Once the trust account is set up, the buyer is to deposit $1,500 into that account. The buyer got a credit (price reduction) of $1,500, so they have those funds. It's a bit roundabout, but it is the standard way of making a security deposit adjustment.

NOTE: If a buyer owns multiple properties with multiple tenants, they can use the same security deposit trust account for all security deposits across all properties. There is no need for a separate account for each property.

I receive a lot of calls from confused clients. Buyers and sellers Realtors – you may consider working this explanation into how you provide information to your clients.

Protect yourself.

Cheers,

Barry

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