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Deposit Dilemmas

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6th July 2016

Contracts for the sale of land can fail to complete for many reasons. The Standard Conditions and Standard Commercial Conditions require a 10% deposit to be paid on exchange of contracts. This can amount to a substantial sum of money. Purchasers will know that where they fail to complete it is commonplace for the vendor to retain that deposit. In the current market, with property prices soaring ever higher, the out-of-pocket purchaser may be justified in feeling that the vendor has obtained a windfall in keeping the deposit and selling the property on to a third party at a higher price.

Section 49(2) of the Law of Property Act 1925 (LPA 1925) gives the court a discretion to order the repayment of any deposit. It provides that: “Where the court refuses to grant specific performance of a contract, or in any action for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit.” At first glance this provision looks promising for purchasers, but the court’s restrictive approach to the return of deposits over the past 15 years has greatly fettered this discretion.

The modern approach

In earlier authorities the courts demonstrated a far more relaxed approach to the return of deposit. More often than not the purchaser was granted relief and they were able to recover their deposit from the vendor, especially where the vendor ultimately sold the property on at a higher price. However, this generous approach was ended by the Court of Appeal in Omar v El-Wakil [2001] EWCA Civ 1090;. Arden LJ explained the approach to be taken at [35]:

“The starting point must be that although section 49(2) is expressed in open textured terms leaving it to the courts to determine the organising principles, the court must bear in mind that the payment in question was a ‘deposit’, that is an earnest for performance and that accordingly there should not be relief simply because the…contract never took place. The meaning of ‘fairness’…in any given situation is context-specific….The context here is of a conveyancing transaction. It is common knowledge that if a purchaser pays a deposit he is likely to forfeit it if he does not fulfil the contract. Moreover, deposits are very usual features of conveyancing transactions and conveyancing transactions are common. It is important that there should be certainty attaching to the consequences of paying a deposit.”

Omar was a line in the sand, after which the courts have applied a stricter, more principled approach to the return of deposits. In Tennaro Ltd v Majorarch Ltd [2003] EWHC 2601 (Ch) Neuberger J adopted a slightly more equitable approach when deciding whether to grant relief in respect of three long leases of flats. The discretion was not exercised in respect of the first agreement for two principal reasons: (1) the failure to complete was due to lack of funds; and (2) the value of the flat had fallen, so damages for breach would be possible. Neuberger J ordered that the deposits be returned in respect of two other flats, where the value had risen and they could have been resold without loss.

The exception, rather than the rule

However, in the more recent case of TBAC Investments Ltd v Valmar Works Ltd [2015] EWHC 1213 (Ch), the court summarised the approach to be taken: “…the discretion should not be exercised in the absence of something special or exceptional to justify overriding the ordinary contractual expectations of the parties: Midill (97PL) Ltd v Park Lane Estates Ltd [2008] EWCA Civ 1227”.

In Aribisala v St James Homes (Grosvenor Dock) Ltd (No 2) [2008] EWHC 456 (Ch) at [13] the court said: “What needs to be looked at is 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 the actual performance of the contractual terms. Where the purchaser simply could not perform the contract or offer any such alternative, then it would be exceptional…for the deposit to be returned.”

Overall, the authorities make it clear that where the purchaser has failed to complete due to lack of funds and the vendor resells the property at a profit, which is attributable to the ordinary rise in market conditions, it is highly unlikely the court will exercise the discretion in section 49(2).

Vexing vendors

However, the courts are more likely to grant relief under section 49(2) where the conduct of the vendor would make it unconscionable for him to retain the deposit. In Cook v Irvine [2016] Central London County Court, 23 March 2016, unreported, HHJ Madge held that the deposit should be returned to the purchaser where the vendor’s conduct contributed to the purchaser’s failure to complete the contract. The purchaser had carried out significant renovation works to the property between exchange and completion to make it possible to obtain a mortgage but was only able to secure bridging finance at the 11th hour after a notice to complete had been served. The court found that the vendor knew the purchaser would be able to complete in a matter of days but rescinded the contract in a cynical attempt to benefit from the rise in the value of the property, which was attributable solely to the works carried out by the purchaser.

Where vendors have behaved opportunistically or inequitably in the time between exchange and rescission the courts are more likely to grant relief to the purchaser. In ordinary cases of contracts failing to complete, the reluctance of the courts to return the deposit acknowledges the risk the vendor takes in holding the property before reselling to a third party, albeit in recent years the risk has been generally low.

This article was originally published in the Estates Gazette.

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