All well drafted contracts for the sale of land will stipulate that the buyer must pay a deposit on exchange of contracts. The deposit performs two functions: it acts as a payment on account and, if the contract is completed, it is put towards the payment of the purchase price. However, a deposit also serves to guarantee the performance of the contract because, even if there is no contractual provision to that effect, the seller will have the right to forfeit the deposit should the buyer defaults.
Importantly, deposits of up to 10% of the contract price constitute an exception to the rule against penalties. Consequently, a seller will be entitled to forfeit the deposit even if it has not actually suffered a loss. What, however, is the position where a seller suffers a loss that is greater than the deposit? Must the seller give credit for the deposit when calculating the damages that it is entitled to recover?
In Ng v Ashley King (Developments) Ltd [2010] EWHC 456 (Ch); [2010] PLSCS 82, the seller argued that the law should be symmetrical. If a seller is entitled to retain a deposit when it has not actually suffered any loss, it would be illogical to require it to take the deposit into account when it has lost out.
The High Court took a different view. The judge reminded the parties that the courts award damages to compensate injured parties for the loss that they have suffered. He then went on to consider a long line of authorities that confirmed that credit must be given for the deposit when calculating any deficiency on the resale of the land.
The judge noted that previous rulings stipulating that the deposit must be offset against the damages claimed by the seller were all made in cases in which the damages claimed included losses sustained on a resale of a property. This prompted him to ask whether there was a difference in a case such as this, where the seller had been unable to sell the land to another party.
The judge was unable to see why this should make a difference, and ruled that the deposit should be deducted from the damages recoverable from the buyer. Consequently, the seller was not entitled to retain the buyer’s deposit and recoup an equivalent sum to cover the deposit that the seller had paid, and lost, for a separate purchase that fell through when the buyer failed to proffer the balance due to complete the purchase of the seller’s land.
The decision confirms another important point. The conditions of sale used in professionally drawn contracts require the buyer to pay interest if it fails to complete. The judge ruled that the conditions create a regime for late completion, rather than a regime for non-completion. Consequently, the buyer was entitled to statutory interest on the damages payable to him, as opposed to contractual interest at the rate specified in the agreement between the parties.
Allyson Colby is a property law consultant
