Mark Pawlowski considers the court’s discretionary power to order the return of a deposit under section 49(2) of the Law of Property Act 1925.
In the context of a contract for the sale of land, a seller’s right at law to forfeit the purchaser’s deposit is mitigated by section 49(2) of the Law of Property Act 1925, which gives the court a discretionary power to order the repayment of any deposit “if it thinks fit”, dependent on a general consideration of the conduct of both parties (especially the purchaser), the gravity of the matters in question and the amount at stake: Schindler v Pigault (1975) 30 P&CR 328 and Universal Corporation v Five Ways Properties Ltd [1979] 1 EGLR 163. Although the jurisdiction is statutory, its discretionary character has been held to be at least akin to equitable relief against forfeiture: see Schindler.
An unqualified discretion?
While any limitation or restriction on the scope of the court’s discretion under section 49(2) would appear to be inappropriate in view of the broad wording of the subsection itself, it is apparent that a number of guidelines have emerged from the cases as to the circumstances in which the discretion to relieve from forfeiture should be exercised in favour of a purchaser. In Cole v Rose [1978] 3 All ER 1121, Judge Mervyn Davies QC interpreted Megarry J’s observations in Schindler as meaning that proof of some special circumstances (suggesting that it was unfair or inequitable that the purchaser should lose his deposit) was necessary to bring a case within section 49(2).
However, this narrow view was not followed by Buckley LJ in Universal Corporation, who preferred to adopt the view that the court had an unqualified discretion under the subsection to order repayment of the deposit when this would represent the “fairest course between the parties”, subject only to the discretion being exercised judicially and with due regard to all the relevant circumstances, including the terms of the contract.
Availability of specific performance
In Dimsdale Developments (South East) Ltd v De Hann (1984) 47 P&CR 1, the court expressed some doubt about the appropriateness of applying the discretion to a defaulting purchaser in a case where the seller was entitled to specific performance of the contract. In the court’s view, section 49(2) was plainly enacted to confer a discretion in cases where the seller was for some reason not entitled to specific performance, and where the purchaser was not entitled to rescission.
In such cases, the purchaser could be liable at law for damages for breach of contract and would be unable to recover his deposit. Despite this reservation, however, the court felt bound to adopt the view expressed by the Court of Appeal in Universal Corporation and held, on the facts, that the justice of the case required that repayment of the deposit should be ordered, but only on terms that the purchaser submitted to a reduction representing the seller’s damages: see also, Ng v Ashley King (Developments) Ltd [2010] EWHC 456 (Ch); [2010] PLSCS 82 (the purchaser of land failed to complete the purchase and the vendor claimed damages, the vendor had to give credit for the amount of the deposit in reduction of the recoverable damages).
Need for certainty
In Omar v El-Wakil [2001] EWCA Civ 1090; [2001] PLSCS 168, Arden LJ considered that the notion of fairness expressed by Buckley LJ in Universal Corporation was “context-specific”. In the context of a conveyancing transaction, in particular, it was common knowledge that, if a purchaser fails to complete the contract, he is likely to lose his deposit and so it was important that there should be an element of certainty attaching to the consequences of paying a deposit.
According to Arden LJ, therefore, the starting point was that a deposit “should not normally be ordered to be repaid”. In Omar, the seller had not sought to prove that he had suffered any loss as a result of the breach of contract. Significantly, Arden LJ considered this to be irrelevant, relying on the principle that, where a purchaser could not himself perform the contract, the circumstances had to be exceptional in order to make it appropriate for the court to exercise its discretion under section 49(2).
General guidance
In Aribisala v St James’ Homes (Grosvenor Dock) Ltd [2008] EWHC 456 (Ch); [2008] 2 EGLR 65, Floyd J provided useful guidance on the factors which the court should consider when exercising its discretion to order repayment of a deposit under section 49(2).
In the first place, it was important for the court to consider how close the purchaser had got to actually performing the contract.
Secondly, it was relevant to consider what alternatives had been proposed to the seller to complete the sale and how advantageous they would be compared with performance of the actual contract itself.
Thirdly, the mere fact that the seller cannot point to any loss arising from the breach will not by itself amount to a sufficient ground for the return of the deposit. Similarly, an increase in the market value will not, on its own, amount to a sufficiently exceptional circumstance justifying repayment. However, the question of whether the seller had made a loss (or a profit) from the purchaser’s breach could still be relevant in some circumstances – in this sense, “overall economic impact” on the seller remained a relevant factor under section 49(2).
Special or exceptional circumstances
In Midill (97PL) Ltd v Park Lane Estates Ltd and Gomba International Investments Ltd [2008] EWCA Civ 1227; [2009] 1 EGLR 65, the Court of Appeal confirmed the view that, in order for the court to exercise its discretion under section 49(2) to order the repayment of a deposit, there needed to be something special or exceptional to justify overriding the ordinary contractual expectations of the parties that the purchaser would lose his deposit if he defaulted.
Thus, in Richards (Michael) Properties Ltd v Corporation of Wardens of St Saviour’s Parish, Southwark [1976] 1 EGLR 163, Goff J, in refusing to order the return of the deposit, concluded that the jurisdiction under section 49(2) should only be exercised “sparingly and with caution”: see also Cole v Rose. More significantly, in Bidaisee v Sampath [1995] NPC 59, a case involving the return of a deposit under an identically worded provision in a Trinidad and Tobago statute, the Privy Council concluded that the absence of any loss by the vendor (because it had resold at a profit) did not of itself provide a sufficient reason for the court to exercise its discretion in favour of a defaulting purchaser. There had to be “something more” to justify the court’s intervention. Thus, in Tennaro Ltd v Majorarch Ltd [2003] EWHC 2601 (Ch); [2003] 47 EG 154 (CS), Neuberger J took into account the fact that the vendor could have sold the property at a higher price but had declined to do so without giving any proper explanation for the refusal. Significantly, the purchaser himself had found the new purchaser (who was willing to pay more than the contract price) prior to the completion date.
The decision, therefore, to exercise the discretion under section 49(2) was fully justified. By contrast, in Midill, in the absence of any special reasons, the seller was held entitled to keep the deposit despite the fact that he had resold the property to a third party for a higher price.
Against this more restrictive approach lies the view taken by Buckley LJ in Universal Corporation, who, as we have seen, opined that the court had an unqualified discretion under section 49(2) to order repayment of a deposit when this would represent the “fairest course between the parties”, subject only to the discretion being exercised judicially and with due regard to all the relevant circumstances.
This wide interpretation of the sub-section has been followed in some cases (notably, in Dimsdale, albeit with some reluctance) and accords with the wording of section 49(2), which expressly provides for an unfettered discretion entitling the court to order the repayment of a deposit “if it thinks fit” to do so.
Interestingly, the Court of Appeal in Midill felt bound to adopt the “most recent, considered guidance” provided by Arden LJ in Omar, which clearly had the benefit of being in line with the balance of judicial opinion including, most notably, the Privy Council in Bidaisee.
The crucial point, therefore, was that a deposit was an earnest for the performance of the contract and, consequently, could be retained by the vendor on the purchaser’s default regardless of whether the vendor had suffered any actual loss as a result of non-completion of the sale or the amount of the deposit.
Essentially, in the words of Lord Nicholls in Bidaisee, there had to be “something more” or (as expressed by other judges) “something special or exceptional”, to justify the court’s intervention under section 49(2). This approach has since been followed in more recent case law: see, Ahmed v Landstone Leisure Ltd [2009] EWHC 125 (Ch); [2009] PLSCS 131; Mulford Holdings & Invest Ltd v Greatex Ltd [2010] PLSCS 34; Barnard v Zarbafi [2010] EWHC 3256 (Ch) (vendor suffered very substantial loss); Cohen v Tesco Properties Ltd [2014] EWHC 2442 (Ch); and Solid Rock Investments UK Ltd v Reddy [2016] EWHC 3043 (Ch) (conduct of the vendor and purchaser to be taken into account).
Conclusion
The question, of course, remains as to what will constitute “something more” or “exceptional” in the given circumstances of a particular case. Interestingly, the Court of Appeal in Midill did not doubt the correctness of Neuberger J’s decision in Tennaro as being a special case where the facts were highly unusual given the very attractive (alternative) offer made to the vendor before the time of completion (which had been arranged by the purchaser himself) and the lack of any stated reason by the vendor for rejecting it.
By contrast, on the facts in Midill itself, it was clearly not enough that the vendor had sold at a higher price some months after the date for completion: see also, Mulford. The delay in reselling distinguished the case from Tennaro but, more importantly, there was nothing to indicate that the resale price was exceptional, given movements in the market generally.
It seems, therefore, that the mere fact that prices have increased in a rising market will not be enough to persuade the court to order the repayment of the deposit. However, the position may be very different if the vendor has been given the opportunity (by the purchaser) prior to the completion date to sell to another purchaser who is willing to pay more than the contract price.
Mark Pawlowski is a barrister and professor emeritus of property law, School of Law, University of Greenwich
