A deposit will not normally be returned if a buyer does not go through with the purchase, as a claimant found out at his expense in a recent case
? A deposit will rarely be returned owing to mere non-performance by the purchaser ? In other cases, the efforts made by the purchaser to offer equally advantageous terms may be critical |
Although, in these difficult times, sales of land may be a tactless subject to address, they are core to the business of many readers. The legal structures for such transactions are well established. In particular, the standard requirement for a purchaser to pay a deposit on exchange of contracts is familiar. Although this deposit is returnable should the seller fail to complete and the buyer either does not or cannot enforce the contract, the expectation is that it is forfeited where the buyer fails to go through with the deal.
A statutory discretion
Section 49(2) of the Law of Property Act 1925 gives the court a discretion to order the return of a deposit. Last year (EG 15 September 2007, p233), we commented on a case in which the court had to rule, for the first time, on whether it is possible to exclude this section.
In Aribisala v St James Homes (Grosvenor Dock) Ltd [2007] EWHC 1694 (Ch); [2007] 37 EG 234, it was held that this could not be done any exclusion was an attempt to oust the court’s jurisdiction and was void as being contrary to public policy.
It thus became necessary to consider whether the purchaser in that case was, on the facts, entitled to the return of his deposit. This was left for another day and that day duly arrived in Aribisala v St James Homes (Grosvenor Dock) Ltd (No 2) [2008] EWHC 456 (Ch); [2008] 19 EG 206 (see p206), Floyd J considered the merits of the claim.
In 2006, the claimant entered into a contract to purchase two properties for some £2m. The deposit was £216,000. He was supposed to complete on 8 September but could not do so. A previous request for an extension had been declined and, on 12 September, the vendor served a notice to complete by 26 September. As is normal, time was of the essence. The purchaser did not, by that date, secure the loan that he wanted to facilitate the transaction. On 27 September, the vendor rescinded the contract and forfeited the deposit.
The claimant pressed for completion, indicating on several occasions that he had the necessary offers of finance. On 12 October, he issued legal proceedings seeking specific performance. Although these were, for a brief period in October, put on hold to allow the purchaser to formulate a payment proposal, the vendor held to its decision to rescind. The claimant subsequently abandoned the claim for specific performance but persisted with that for the return of the deposit.
The terms of section 49(2) are broad – the court is given the power to order the return of the deposit “if it thinks fit”. The judge therefore first examined previous case law to see whether this established any guidelines for the exercise of this discretion.
In Universal Corporation v Five Ways Properties Ltd (1978) 250 EG 447, the court suggested that “repayment must be ordered in any circumstances which makes this the fairest course between the two parties”. However, in Omar v El-Wakil [2001] EWCA Civ 1090; [2002] 2 P&CR 3, Arden LJ took a stricter line. She noted that what is “fair” must depend upon the circumstances.
The context of a deposit is that it is an earnest for performance it is well known that in sales of land a deposit is likely to be forfeited if the purchaser fails to complete and it is important that the consequences of paying a deposit should be certain. Relief should not be available merely because the sale does not go through and she thought that the starting point should be that the deposit should not normally be repaid.
Although Arden LJ concluded that where a purchaser cannot complete, it would require “exceptional circumstances” for the return of the deposit to be ordered, Floyd J, rightly, pointed out that this probably went too far.
Section 49(2) is relevant only where it is the purchaser that cannot perform if the vendor cannot complete, the purchaser has a legal right to the return of the deposit. He thought that the right approach was to see:
“how close the purchaser came to performing the contract, what alternatives he was able to propose to the vendor and how advantageous they would be compared with actual performance of the contractual terms. [Only] where the purchaser simply could not perform [or] offer any such alternative would [it] be exceptional for the deposit to be returned.”
He also considered the significance of whether the vendor has made a loss as a result of the purchaser’s failure to complete.
He was satisfied that the case law showed that the economic effect of the breach is a relevant factor. If the vendor could resell at a higher price, this may justify the return of the deposit but it is not a sufficient ground.
Should the deposit be returned?
Having settled the relevant principles, the judge considered the factors that the claimant put forward to justify the return of the deposit. Having weighed these against the need for certainty and the fact that a deposit is not usually refundable, he concluded that they did not, either individually or cumulatively take this case out of the ordinary run of cases where the purchaser cannot produce the money. In particular, he was not swayed by the fact that the vendor made a profit in a rising market, this was not unusual.
It is worth noting some of the arguments that the claimant raised since the judge’s view of these may be helpful in eliminating misguided claims for the return of a deposit.
? The size of the deposit and the fact that it amounted to a significant proportion of the purchaser’s assets. Although the deposit was large, it was the normal 10%. Further, the purchaser was wealthy and the deposit was not a large part of his assets.
? Arguments were raised concerning the claimant’s attempts to raise the finance from various sources and the fact that he was at all times wanting to complete.
Although the judge was satisfied that the claimant had endeavoured to obtain the necessary loans, he had always overstated to the vendor the imminence of a solution. Furthermore, some of the difficulties arose because he wanted a more tax-efficient offshore mortgage and much of this activity did not occur until after the date upon which completion should have taken place.
? Finally, the claimant relied upon the vendor’s unwillingness to negotiate and give him time to complete.
The judge thought that the vendor had played hardball, but it had been entitled to do so. The purchaser had not come up with a firm proposal that was at least as advantageous as the original deal.
Sandi Murdoch, honorary fellow, Reading University
