A deposit paid on exchange of contracts performs two different functions. It acts as a payment on account and will be applied towards payment of the purchase price. However, it also serves as a guarantee of performance because the seller will have the right to forfeit the deposit if the buyer defaults. Consequently, most sellers will refuse to exchange contracts with a buyer until they have received the full amount payable.
What, however, is the position if a seller accepts a sum that is less than the full 10% deposit normally paid on exchange of contracts or if the buyer does not pay a deposit at all and subsequently fails to complete? Most well-drafted contracts provide that, on receipt of a notice to complete, the buyer must forthwith pay any balance of the 10% deposit due to the seller, or the whole 10% deposit if nothing has been paid at all. Are such rights enforceable?
Hardy v Griffiths [2014] EWHC 3947 (Ch) concerned the sale of a manor house in East Sussex. The buyers agreed to buy the house for £3.6m, but failed to comply with a notice to complete because they were unable to sell their own house and did not have the funds needed for the purchase. When the notice to complete expired the sellers rescinded the contract in accordance with the conditions of sale in the contract, which give the seller the right to forfeit the deposit in such circumstances, and issued proceedings to recover £210,000, which was the balance due to bring the deposit paid on exchange of contracts up to 10% of the purchase price.
The buyers pointed to Lowe v Hope [1970] Ch 94. In that case, the court ruled that it would be contrary to principle if a seller who had brought a contract to an end were, nonetheless, to be entitled to insist on the performance of the contract in relation to the deposit. However, the judge preferred the rationale in Damon Compania Naviera SA v Hapag-Lloyd International SA [1985] 1 WLR 435 and Firodi Shipping Limited v Griffon Shipping LLC [2014] 1 CLC 1.
In Damon, the Court of Appeal stated that a purchase price is payable in return for a conveyance and, if the obligation to convey has gone following the acceptance of a repudiatory breach, there is no longer a purchase to which the price can be related. However, the seller’s right to forfeit a deposit is not dependent on completion of the purchase. The right to forfeit arises out of the breach and is quite different from the right to receive purchase money in return for a conveyance. Both Damon and Firodi were shipping cases, but the Court of Appeal refused to distinguish between the rules relating to deposits under contracts for the sale of ships and land in Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445.
Consequently, the judge rejected the buyers’ argument. Sellers will welcome the decision, which confirms that a right to receive the balance of a partly paid deposit, which is unconditionally acquired before a seller exercises its contractual right to rescind, will survive rescission – unless the contract contains clear words to the contrary.
Allyson Colby is a property law consultant
