By Greg Barnbrook & Chris Hill
'It's not fair they have taken my deposit. Is there any way I can get it back?'
A recent case reminds us all of the vulnerability of deposits paid in property transactions. Whilst statute might exceptionally come to the aid of those who cannot complete a contract and lose their deposit - ordinarily loss of a deposit is no more than what you bargained for.
Solid Rock Investments UK Ltd -v- Reddy  EWHC 3043 (Ch)
Parties exchanged contracts for development land with a pending application for planning permission. The purchase price was £430,000. A 10% deposit, in the sum of £43,000, was paid on exchange.
A few days prior to the completion date, the purchaser informed the vendor that due to funding problems, he would struggle to complete on time. Upon which the vendor (without obligation and on 2 separate occasions), made an offer to extend the completion date by two weeks in exchange for a sum - the purchaser did not respond to this offer.
The purchaser failed to complete on the completion date. As a result, a notice to complete was served. The purchaser still did not complete by the expiry of the notice to complete date (as he was not in funds).
The vendor rescinded the contract the following day - thereby forfeiting the deposit. The very next day the purchaser advised the vendor that he was in funds to complete and offered to pay interest, as well as costs. However, the vendor was unmoved.
Subsequently, the vendor resold the property - by this time with the benefit of planning permission (as the application was successful) for the increased sum of £530,000 (i.e. £100,000 higher than the original purchase price).
The original purchaser issued court proceedings for the return of his deposit and relied on the facts that:
- The vendor knew the purchaser was sourcing his funds from a foreign bank (a Nigerian bank) and that the purchaser had difficulties in completing on time.
- The purchaser was ready and willing to complete only one day later than the completion date specified on the notice to complete.
- The purchaser was willing to pay interests and vendor's costs.
- It was unfair that the vendor would benefit tremendously from the forfeited deposit plus the uplift in property value.
Although the Court recognised the fact that the vendor would receive a substantial gain from the forfeited deposit and the resale of the property with planning permission at a higher value, it refused to order return of the deposit. The decision was upheld on appeal at the High Court.
Key significance and takeaway points
The decision does not represent new law (and will come as no surprise to those well versed in such matters). However, it offers an opportunity to revisit why this is the case and when return of a deposit might be possible.
Firstly, as a matter of contract virtually all property contracts (in their various forms) will provide for payment of a deposit (usually 10%), a completion date and the ability to forfeit the deposit if completion does not take place on the specified day - although usually only after time is made of the essence' (i.e. the contract can thereafter be immediately terminated) following service of a notice to complete.
Parties are usually therefore strenuously advised not to exchange until they have completely finished due diligence and until they can be categorically sure that completion is within their control. If not, the loss of control of the process will place the deposit immediately at risk. Nonetheless, this continues to occur on a high number of occasions.
Parties are therefore also usually advised that if they do not complete on completion (or rather after a notice to complete is served) then they can say goodbye to their deposit - as this is expressly provided for in the contract. The fact that a vendor does not suffer a loss (or even makes a profit) is usually of no assistance. Further, arguments that the forfeiting of the deposit is a 'penalty' and therefore unenforceable have already been tested and have been unsuccessful.
The only reason therefore that return of the deposit is usually even a possibility is that statute (section 49(2) of the Law of Property Act 1925) grants the Court a discretion to return it.
In considering this discretion, case law has made clear that a deposit will only be returned when the circumstances are exceptional or special to override the ordinary contractual position.
Whether or not a circumstance is exceptional is fact specific, but the Court would take the following factors into considerations:
- Has the vendor contributed to the purchaser's failure to complete?
- The alternatives proposed to the vendor to complete and how close the purchaser came to completing. If the purchaser simply could not perform his contractual obligation nor offer any alternatives, then the deposit would not be repaid.
- The economic impact on the vendor - however, the fact the vendor had not suffered any material loss is not in itself, a sufficient ground for the Court to order deposit repayment.
- Funding matters outside purchaser's control do not of themselves give rise to an exceptional circumstance.
In this case and respectfully, the purchaser should never have exchanged without completion being within its control. From that point it was at risk. However, perhaps its larger mistake was that it should have taken up the vendor's offers to delay completion - even though at a price. One assumes the purchaser gambled on a deal always being available and did not adequately take on board the vulnerability of its situation.
Takeaway point 1 - remember the fundamental basic point. A deposit is treated as a guarantee of contractual performance given to the vendor. If you failed to complete, expect to lose it.
Takeaway point 2 - Do not exchange and commit to complete unless you have certainty that you are able to complete on time as agreed (i.e. most often that your funding / mortgage is in place).
Takeaway point 3 - If you are offered a lifeline, seriously consider accepting it and do so quickly. Once time has been made of the essence, the seller is in a very strong position. Saliently, in this case, if the purchaser chose to accept the vendor's offer to extend completion, he would have been able to complete on an agreed time and later on, received the benefit of the planning permission granted which led to an increase in property value.
Takeaway point 4 - All is not always lost - true one can ordinarily expect to lose its deposit in such situations, but the case highlights that there are shafts of light. With adjusted expectations, it may well be worth investigating the why and the how to see whether it is worth applying for a return of the deposit under the Court' discretionary power - just remember that the circumstances have to be 'exceptional' and that that has its own legal interpretation in this context.
If you need any advice on any issues raised in this article, please contact either Chris Hill or Greg Barnbrook within our property litigation team.