All well-drafted contracts for the sale of land stipulate that the buyer must pay a deposit on exchange of contracts. The amount paid performs two functions. It acts as a payment on account; if the contract is completed, the deposit is applied towards the payment of the purchase price. It also serves as a guarantee of performance because the deposit can be forfeited if the buyer defaults.
The customary deposit on a sale is 10% of the purchase price. Buyers therefore risk losing a considerable sum if they fail to complete. However, section 49(2) of the Law of Property Act 1925 makes special provision for the return of deposits. It empowers the court to order the repayment of a deposit to a buyer who defaults on an obligation to complete a contract to purchase land.
The jurisdiction is discretionary and is to be exercised where justice requires it. Some judges have interpreted section 49(2) as giving the courts a wide discretion, based on what justice demands. Others have ruled that the courts will exercise their discretion in a buyer’s favour only if special circumstances would render it unfair or inequitable for the buyer to lose his deposit. Consequently, the Court of Appeal in Midill (97PL) Ltd v Park Lane Estates Ltd [2008] EWCA Civ 1227; [2008] PLSCS 303, said that the learning in respect of the section has remained surprisingly incoherent, despite the fact that section 49(2) was enacted more than 80 years ago.
Midill offers welcome guidance on the way in which the courts will exercise their discretion when dealing with an application for the repayment of a deposit to a buyer in default. Their lordships ruled that the mere fact that the seller had resold the property at a profit was not enough to justify repayment of the deposit to the original buyer. A deposit is an earnest for performance, and the reasons for taking a deposit are not overridden by section 49(2). Consequently, in a situation where a buyer cannot himself perform, that buyer must establish something special or exceptional to justify overriding the ordinary contractual expectations of the parties.
The decision concerned a transaction that took place before the credit crunch. Practitioners are being asked to advise whether a sudden drop in the value of a property and/or a buyer’s inability to complete owing to the prevailing economic climate constitute exceptional circumstances that would justify an order to return a deposit. The Court of Appeal did not deal with this. However, inability to complete is exactly the type of risk that a deposit is intended to guard against. Consequently, it seems unlikely that the courts will order the repayment of a deposit, and compel the seller to bear the loss, if a buyer is unable or unwilling to complete because of the economic downturn.
Allyson Colby is a property law consultant
