My Minnesota clients have been running into "non-refundable" deposits recently, and it's caused them some issues. Whether it's a deposit for an apartment you want to rent or a deposit to hold your child's spot in an upcoming activity, it's become a very common part of contracts. In many cases, you aren't in a position to negotiate over whether your deposit is refundable or not. Usually, it's a form contract, and the person who drafted it will tell you that's just the way they do business. Because you want that apartment or your child wants to participate in that activity, you'll just sign the contract and never think about it again. But, if the last 17 months have taught us anything, it's that you may need to think about these things and make sure you understand what you are signing.
The non-refundable deposit debate really came front and center in 2020. As the pandemic shut down many businesses, one of the hardest-hit industries was the events business. The events that got the most press? Weddings. Weddings present the perfect test case for this issue because there is a lot of money involved in the event and even more so because there are many emotions involved as well. When you plan your wedding, you are likely planning for the most important day of your life. You want everything to be perfect and often cost is not an issue to make your day perfect.
So, as the pandemic shut down venues and weddings didn't happen, business owners were left with a conundrum: What to do with all those deposits? It's one thing to have a deposit and then have a client just not show up for their event after you've prepared the venue and your services for them. It's quite a different thing to be unable to even open the venue and allow your client and their guests to attend the wedding. Many businesses I work with found that they needed to come up with a solution for all those events that couldn't happen.
A common solution was to hold the deposit and reschedule the events for a year later (or some other time period in which they thought they would be able to hold events again). Assuming you and your client are on the same page with this scenario, this was a good way for everyone to continue with their contract.
Refunding Those Deposits
The greater challenge comes from those events and deposits that can't happen. Whether it's from a pandemic shutdown or some other impossibility of the event happening, what should you do with those deposits? For example, if you're a photographer and you've received a deposit, but you are unable to take the photos because of a shutdown, what happens to that deposit? Even though your contract says the deposit is "non-refundable" you may be directed to give the money back.
In these cases, when the issues have gone to court, the courts have ruled that if the photographer (or other business) is the one who has breached the contract, they may be required to return all the money. And in some cases, they've even been required to pay for the attorney fees for the client who had to bring a lawsuit.
What Can Businesses Do?
So, before you immediately inform your clients that whatever deposit they gave you is non-refundable, it may be a good idea to review your contracts. Now that we've been through a strange year of events being canceled for reasons we never anticipated, what does your contract say? Do you have a provision that explains to the client what happens to their "non-refundable" deposit in case the event can't happen due to events beyond everyone's control? If you do, you want to make sure to explain that to your clients in advance. If you don't? Now's a good time to review that contract entirely and make sure you've got these types of scenarios addressed.
If you are dealing with an issue of refunding a "non-refundable" deposit, or if your contract for your clients hasn't been updated in a while and you aren't sure if you're covered in case of a shutdown, let's set up a Legal Strategy Session to review the best options for you and your business.