Property Deposits and Engagement Rings

The Importance of Being (an) Earnest; Property Contract Deposits and Engagement Rings. The legal process of buying a property shares many elements with engagement and marriage, not least the role of a deposit and its origins.

 

"The special treatment afforded to such a deposit derives from the ancient custom of providing an earnest for the performance of a contract in the form of giving either some physical token of earnest (such as a ring) or earnest money. The history of the law of deposits can be traced back to the Roman law of arra"

A friend informed me during a lock-down zoom that the price of diamonds had plummeted. This bit of market news came about as a result of a lock-down deep clean of her house that turned up a haul of lost or forgotten treasure including an engagement ring still in her possession from a long broken betrothal. She was advised by a jeweler friend to keep hold of the ring, or at least the diamond, (good money for gold in a pandemic) until the economy recovers and once again men's minds turn to affairs of the heart and more importantly the confidence to part with the customary month's wage for an engagement ring returns.

What intrigued me about the story was not the price of precious metals or the future of De Beers, but the story behind the ring. Engagements break, it's a fact of life but I couldn't help but wonder about the protocol relating to the redundant ring. Was my friend entitled to keep the ring like a deposit under a property contract as the marriage didn't go ahead?

In many respects the process of purchasing a property is analogous to courtship and marriage and particularly the use of a ring and a 10% deposit to demonstrate commitment to an arrangement. The buyer and seller are introduced to each other by a someone (estate agent), and after a period of flirtation the couple agree they could be right for one another (price agreed and offer accepted). There follows a period of getting to know and trust each other (due diligence by the buyers' solicitor on the property and the seller's solicitor on the buyer's finances ) until they are both prepared to commit and get engaged (exchange contracts) and set a date for marriage (completion).

The analogous engagement ring is generally a deposit of 10% of the purchase price under a property contract and the seller is entitled to keep or "forfeit" this sum if the buyer is unable or unwilling (depending on the legal argument) to complete.

Under general contract law, a deposit is only capable of being forfeited if it is a genuine pre-estimate of contractual loss, otherwise it is considered to be an unlawful penalty clause. However, protocol and custom provides for and allows a 10% deposit to be paid on an exchange of property contracts and in the event of the buyer failing to complete at all the seller can forfeit the full 10% deposit irrespective of the level of any loss it might suffer as a result of the buyer's failure to complete.

 

The Privy Council case of Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] UKPC 7 considered the payment of a 25% deposit under a property contract; the judgment contained a lengthy and illuminating consideration as to the unique nature of  deposits under property contracts:-

"The special treatment afforded to such a deposit derives from the ancient custom of providing an earnest for the performance of a contract in the form of giving either some physical token of earnest (such as a ring) or earnest money. The history of the law of deposits can be traced back to the Roman law of arra"

In Dojap, the buyer failed to complete and the seller sought to forfeit the 25% deposit. The Privy Council had to consider whether it was reasonable for the deposit to be above and beyond the customary 10% or whether it was in truth a penalty intended to act 'in terrorem'. It concluded the latter and ordered the return of the entire 25% deposit to the buyer.

However in Amble Assets LLP and another v Longbenton Foods Ltd [2011] EWHC 1943 (Ch) (21 July 2011) the High Court considered the question of a deposit in excess of 10% and declined to follow Dojap. The Court held that contractual terms providing for the payment of a non-refundable deposit could not be challenged as an unlawful penalty as a deposit was not in effect advance compensation in the event of failure by the buyer to complete but simply a means by which a buyer could demonstrate to a seller that it had a genuine commitment to complete a transaction.

The Court went on to state that if a buyer considers the forfeiture of its deposit to be unfair, then it can apply to the courts for relief under s49(2) of the Law of Property Act 1925.

There have been a number of cases concerning applications for the return of a deposit under s49(2) of the Law of Property Act 1925 but it is clear that the courts will only help out a buyer in exceptional circumstances.

A case to finalize the issue of deposits larger than the customary 10% in relation to property contracts would be welcome (in the Amble Assets case the deposit was 10% in relation to the property elements and the higher deposit in relation to a business sale agreement) especially given that in these uncertain economic times sellers and developers might well want a deposit of more than 10% and there is an increased likelihood of buyers failing to complete.

 

So should a suitor who spends a month's salary on an engagement ring evoking the Roman law of arra like a property deposit expect it to be forfeited in the event of cold feet?

The question of engagement rings was considered important enough to be addressed by Parliament and the Law Reform (Miscellaneous Provisions) Act 1970 states that unlike an exchange of property contracts, an engagement to marry is not enforceable at law and that:-

"the gift of an engagement ring shall be presumed to be an absolute gift, this presumption may be rebutted by proving the ring was given on the condition express or implied that it should be returned if the marriage did not take place for any reason"

Accordingly it would be safe to assume that all engagement rings are indeed gifts, as any attempt whilst on bended knee to negotiate terms and express that the gift of an engagement ring is conditional is likely to result in the seller looking for a new buyer.

11 December, 2020
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