In brief - Vendor unsuccessfully sues for other half of deposit
There have been many decisions and much debate about whether a vendor can claim the balance of a 10% deposit where a purchaser defaults. Many recent authorities have held that the vendor is not entitled to do so and this question was considered afresh in late October 2016 in the matter of Kazacos v Shuangling International Development Pty Limited NSWSC 1504
Contract clause regarding payment of other 5% found to constitute penalty
In this matter the deposit paid was 5% on exchange.
There was a clause in the contract that stated that the other 5% was payable on the completion date or the date when the purchaser defaulted under the contract.
The obligations of the purchaser were guaranteed by one of the directors.
The situation was that, after numerous extensions, the vendor terminated the contract as the purchaser was unable to settle.
The vendor resold the property at a higher price but then sued for the other half of the deposit.
Justice White held that the clause constituted a penalty and the vendor was not entitled to claim any other monies from the purchaser.
Default payment found not to be an earnest of the bargain
The nature of a deposit is that it is essentially an "earnest" of the bargain made between the parties and the purchaser's performance of the bargain.
His Honour held that, in this case, the payment to be made on default had nothing to do with binding the purchaser to its bargain and was not in any way a genuine pre-estimate of damages for breach.
The Court held that the time when the second tranche of the so-called deposit was to be paid was when the purchaser had already demonstrated that it was unable to complete.
The Court seemed to be very much influenced by the fact that the vendor made a significant profit from the purchaser's default. Not only did it get to keep $850,000 being the initial 5% deposit as well as extension fees, it has resold the property for $1,000,000 more than the original purchase price.
Vendors should consider risk of accepting less than 10% deposit on exchange
The Courts consistently held that where a deposit is accepted on exchange, then this is the amount that the parties have agreed is the "earnest" for performance of the purchaser's obligations.
If the clause stipulated that the deposit was payable, in this instance, as to 5% on exchange and 5% by a given date which was say the day when settlement should have taken place, and it was stated that this payment had to be made on that date even if the delay in settlement was not caused by the purchaser, this may assist, but it is doubtful.
Therefore, it has to be understood that if you are a vendor and you accept less than the normal 10% deposit on exchange, if the purchaser defaults it is most likely that the accepted deposit amount is the only amount that you are going to be able to recover, as any attempt to recover anything more will be deemed by the Courts to be a penalty.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.