You do not have Javascript enabled Deposit or Penalty: What Happens to the Other Half of a ‘Deposit by Instalments’ When a Property Sale Goes Wrong? - Trinity Law
Oct 25, 2018

Deposit or Penalty: What Happens to the Other Half of a ‘Deposit by Instalments’ When a Property Sale Goes Wrong?

Contact: Michael James and Andrew Ekert

Introduction

In 1889, Lord Macnaghten (of the UK House of Lords) proclaimed, “everyone knows what a deposit is”. Later, in 1980, Justice Brooking of the Victorian Supreme Court added a rider:

“… unhappily the law is not clear on the simple question whether a vendor who puts an end to the contract by accepting the purchaser’s repudiation of it may recover a deposit that has been promised but not paid”.[1]

Sadly today, the law is still not much clearer.

Deposits by Instalment

For a variety of reasons, it has become increasingly common for vendors to accept 5% deposits from buyers payable on exchange (the date the parties’ signed contracts are swapped). So ubiquitous has this practice become that there is now a simple tick-box on the contract to select this option. In circumstances where the buyer breaches the contract and the seller follows the correct procedural steps, the contract is clear: the seller gets to keep the full 10% of the deposit. And of course, the same goes for the buyer when the seller is in breach.

What is not so clear is when one party ‘repudiates’ (that is, communicates an intention not to fulfil or be bound by) the contract, and the other party terminates the contract as a result. Technically, because a repudiation is not a breach of the contract,[2] the contractual terms relating to the second half of the deposit don’t apply. In these circumstances, it is left to the Courts to decide which party may keep the other half of the deposit.

Kazacos v Shuangling International Development Pty Ltd

This precise issue was recently considered by Justice White in Kazacos v Shuangling International Development Pty Ltd.[3] The case concerned the sale of a property for $17M where the contract allowed a 5% deposit to be paid on exchange (the rest being payable at settlement). After several extensions (made at the buyer’s request), the seller eventually terminated the contract for the buyer’s repudiation. The seller subsequently sold the property to another party (at a significant profit) and pursued the buyer in Court for the rest of the deposit.

The key question Justice White had to consider was whether the remaining 5% of the deposit was the buyer’s promise “of the bargain or its performance” (and thus payable to the seller) or a “penalty” payable on the buyer’s default (and thus not payable to the seller). In reaching a conclusion, Justice White noted that there were “conflicting decisions on this question in this Court” and attempted, as best as his Honour could, to reconcile them.

In deciding that the remaining 5% was a penalty, Justice White considered most relevant the fact that it was payable at settlement. That being the case, the amount could not truly be considered an amount guaranteeing the buyer’s performance of the contract (because payment of the remaining 5% was itself performance of the contract).

Notwithstanding, Justice White noted that in the usual course, a deposit that was not “excessive or unconscionable in amount” would be payable on the buyer’s default, regardless of whether it was an ‘instalments deposit’ or not.

It remains to be seen how Justice White’s thinking might play out in an a more modest residential sale where 5% of the purchase price could be considered a reasonable estimate of the seller’s costs of a failed purchase. Further, the outcome may well have been different had the seller made a significant loss (not profit) on the resale of the property.

Conclusion

When entering into a contract for sale of real property involving a deposit by instalments, there is significant uncertainty about who gets to keep those instalments if things go wrong. Buyers should assume that the second instalment will go to the seller, and sellers should assume that the buyer may put up a fight relinquishing the second half.

However, as you can see, the law is not clear. if you find yourself in such a situation, it’s best to talk to us to help you put the pieces together!

[1] Bot v Ristevski [1981] VR 120.

[2] Cooper v Ungar (1958) 100 CLR 510.

[3] [2016] NSWSC 1504.

 


The information in this document represents general information, and should not be relied for your specific circumstances. If you require legal advice and assistance on the matters contained or associated in this document you should contact Trinity Law. Subject to the limits of the law, Trinity Law disclaims any liability on persons relying on this document.

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