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Case update - what happens with the deposit when a vendor terminates the contract?

conveyancing conveyancing act property purchasing property selling property supreme court Aug 10, 2022

Typically, when selling property, the deposit which is paid at the time of exchange is held by the deposit holder, usually the selling agent, until settlement has taken place, at which time it is released to the vendor.  In some instances, it may be released to the vendor prior to settlement if the Contract contains provision for the vendor to use the deposit to pay a deposit of their own, stamp duty on a purchase or payment of a residential bond.

What happens though if the purchaser breaches the contract?  What if the purchaser breaches the Contract without having paid the full deposit? In what circumstances can the vendor keep or recover the full deposit?

This issue was considered in Proietti-Formaggio v Sacca [2022] NSWSC 1019 which was recently heard before the Supreme Court of New South Wales.

The parties entered into a Contract for the Sale and Purchase of Land subject to a 10 business day cooling off period which was due to expire on 14 December 2020.  The purchase price was $2,350,000, with a standard 10% deposit of $235,000 due and payable by the purchaser, pending settlement.

Clause 2 of the Law Society Standard Form of Contract (2019 edition) requires the payment of the deposit to be made at the time of exchange with the timing of this being essential. 

Section 66U of the Conveyancing Act 1919 (NSW) states that if a purchaser rescinds a contract during the cooling off period then an amount equivalent to 0.25% of the deposit is forfeited.

In practice a purchaser will typically pay a 0.25% deposit at the time of exchange, with the balance of the full deposit due to be paid before the end of the cooling off period.

In the case in question the purchasers paid $5,875 (0.25% of the purchase price) at the time of exchange but failed to pay the balance of the deposit before the end of the cooling off period, and instead only paid a further $10,000 – leaving a deposit balance of $219,125.00. This was despite the cooling off period being extended considerably at the request of the purchasers’ solicitor to allow the purchasers time to obtain formal loan approval.

The purchasers failed to settle on the due date for settlement, being 29 January 2021, so the vendor’s solicitor issued a Notice to Complete requiring the purchasers to settle by 15 February 2021. Again, the purchasers did not settle.

On 16 February 2021, the vendor’s solicitor served a Notice of Termination on the purchasers and their solicitor, terminating the contract and stating the vendors would retain the deposit paid and take action for the recovery of the remaining balance of the deposit.

The property was subsequently sold for a higher amount on 22 February 2021, only a week later.

The purchasers sought an order under section 52(A) of the Conveyancing Act 1919 (NSW) which allows the Court the discretion to order the repayment of the deposit to a purchaser if the forfeiture is considered unjust or unequitable in the circumstances.  The purchasers argued that given that the property subsequently sold for a higher amount ($180,000 more) shortly after the termination of the contract, the vendors did not suffer any economical loss as a result of their failure to complete the contract.

The Court ruled against this stating that:

Ordinarily, it would be expected that a purchaser seeking relief under s 55(2A) would provide a full account of the circumstances that led to the forfeiture of the deposit.”   

As no explanation was given by the purchasers as to why they did not complete nor any evidence to show that the delay and/or failure was due to circumstances outside their control, the Court could not rule that the forfeiture of the deposit was unjust or unequitable in the circumstances. The purchasers were ordered to pay to the vendors the balance of the deposit plus interest calculated from 1 February 2021, being the date after the original settlement date under the contract.  The purchasers were also ordered to pay the vendors’ costs of the court proceedings.

The take away from this is that the dates for payment of the deposit and completion are essential terms of the contract.  Purchasers must do everything in their power to complete or to bring about completion of the Contract, or risk losing the deposit on termination of the Contract.

Contact the Shire Legal team if you have any questions.

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