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When will a defaulting buyer have his deposit returned to him? Given that an increasing number of buyers are finding themselves unable to complete contracts that were exchanged when the property market was less gloomy, this is an issue of considerable importance. The answer lies in s49(2) which says that ‘the court may, if it thinks fit, order the repayment of any deposit’.
But, how will the court exercise its jurisdiction? Defaulting buyers traditionally quoted Maktoum [1980], where the buyer failed to complete: the seller forfeited the deposit, but then sold the flat for more, so the end result was that the seller benefited from the buyer’s default. In that situation, the court ordered the deposit to be returned – but that is now regarded as an extreme (wrong) example. These days, the leading authority is Omar [2001] where the CA said that ‘special circumstances’ would be required to justify a deposit being returned. A deposit was described as ‘an earnest of performance’, and thus likely to be forfeited if the buyer failed to complete. Moreover, it was noted by the court that it is common knowledge that a deposit is likely to be forfeited if a buyer fails to complete, an inability to complete is a risk that a deposit is intended to guard against.
Earlier this year, we had the High Court case of Midill [2008]. There, the price was £4m and the buyer paid a £400,000 deposit. He subsequently failed to complete, and the seller resold elsewhere for £4.3m. Although the seller had profited from the buyer’s default, the court ordered that the seller was still entitled to keep the deposit. There were no ‘special circumstances’ justifying a departure from the normal approach. Moreover, that decision has now been confirmed by the CA which reiterated the principle set down in Omar [2001]. There was nothing ‘special’ or ‘exceptional’ about the circumstances in this case, and the mere fact that the property was sold for more to someone else did not make it ‘special’ or ‘exceptional’. Moreover, the CA went out of its way to emphasise that a contractual provision for a deposit on the sale of land is best regarded as an exception to the general principles governing penalties in contracts (which say that an unreasonable pre-estimate of loss will be an unenforceable fine). Thus, this exception allows a deposit to be validly forfeited, even if the deposit sum bears no resemblance to the anticipated loss to the seller resulting from the breach of contract (and the fact that the seller may make a profit does not alter that fact).
All in all, we have a clear message from the CA that defaulting buyers can expect to lose their deposit unless there are genuinely ‘special’ or ‘exceptional’ circumstances. Midill v Park Lane Estates [2008] EWCA Civ 1227© Practical Lawyer
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