By : Alexander Bastin
Deposits are paid as a guarantee or security for performance of the contract and as part of the purchase price. It is very firmly established that unless the contract states otherwise, the purchaser forfeits the deposit if it fails to complete in accordance with the contract; no express forfeiture clause is required. Deposits of 10% of the purchase price have, by custom, become normal in most conveyancing transactions. But what happens if a deposit is provided for but not paid or is only partly paid? An I.O.U. given for the deposit is evidence that can be used by the vendor in a claim for payment. If part of a deposit is paid, however, it would appear that the vendor cannot sue for the balance (Lowe v Hope). Nonetheless, subsequent cases (Buckland v Farmar and Johnson v Agnew), albeit not quite on point, suggest that this is wrong and that any unpaid deposit can be recovered as damages.
The Court has a wide and general discretion under Section 49 Law of Property Act 1925 to order the return of a deposit, and should look to achieve the fairest course between the parties. Matters to be taken into consideration include the conduct of the parties (especially that of the purchaser), the size of the deposit and the seriousness of the matters in question; there is no need to show the vendor has misconducted itself. For example:
- Schindler v Pigault: held that a vendor that had not given access to a sub-purchaser could not rely upon the purchaser’s failure to complete by the agreed date as a defence to the purchaser’s rescission claim. Consequently the return of the deposit was just and equitable.
- Universal Corp v Five Ways Properties Ltd:held that the intervention of circumstances beyond the purchaser’s control (i.e. a change in Nigerian exchange control law) meant that the matter should be allowed to go to trial.
- Maktoum v South Lodge Flats Ltd:the deposit was ordered to be returned as apparently it was still possible to re-sell the property at a profit,
- Dimsdale Developments v De Haan: the Court reluctantly ordered the return of a deposit where the vendor had suffered damage but resold at a greater profit. A deduction was made equivalent to the vendor’s damages.
- Tennaro Ltd v Majorarch Ltd:deposits were returned where the value of two flats had risen and re-sale without loss was possible. A third deposit remained forfeit as the failure to complete was due to lack of funds and the value of the flat had fallen.
It should be remembered that the Court will not always take such a generous view and cases exist which demonstrate both a stricter and narrower approach, such as in Omar v El-Wakil where the Court took as its starting point that the deposit should not normally be repaid (even though here the vendor was also at fault). The Court referred to the importance of certainty “attaching to the consequences of paying a deposit”. It will be difficult to recover a deposit in a commercial transaction between businesses with access to professional advice.
It is sometimes said that the Court also has a discretion in equity where forfeiture is penal and it is unfair for the vendor to retain the deposit. The scope of the Court’s jurisdiction is uncertain and has varied between seeking certainty (i.e. against the return of a deposit) and seeking justice in the particular case. The present trend appears to be in favour of certainty - bad news for purchasers - but Lord Hoffman (in Union Eagle Ltd v Golden Achievement Ltd) left open the possibility that the law of restitution and estoppel might develop in such a way as to prevent the unjust enrichment of vendors.
A couple of other points that may be worth noting are that since deposits are not genuine pre-estimates of loss likely to be incurred by breach, they are an exception to the general rule that penalties are unlawful. However, a 25% deposit has been held to be unlawful and ordered to be repaid (the Court refused to allow the retention of a reasonable sum such as 10%). Further, the Court’s jurisdiction under Section 49 cannot be ousted by contract. Damages for breach of contract can be claimed even if a deposit is returned and the Court has discretion to award interest on a returned deposit. In addition, a defaulting purchaser can recover both (1) instalments of the purchase price that are not a deposit, and (2) a deposit paid in the absence of an executed contract.
Generally therefore, as with many aspects of conveyancing, it is a case of caveat emptor, save perhaps where no fault attaches to the purchaser or where the value of the subject property has risen.