William Griffiths QC is a successful silk but was the unsuccessful defendant in the widely reported case of Hardy v Griffiths [2014]. Mr and Mrs Griffiths had exchanged contracts with the claimant, Mr Hardy, to buy Laughton Manor for £3.6m and paid £150,000 on account of the 10% deposit, the contract incorporating the Standard Conditions of Sale (SCS). 

The Griffiths failed to complete, alleging misrepresentation about the presence of damp and rot in the property. Mr Hardy sued them and was successful, the deputy judge, Amanda Tipples QC, observing that Mr Griffiths ‘found it difficult simply to answer the question put. This was because he could not resist arguing his case.’ The simple facts were that the buyers had agreed to buy the property in the state it was in at the date of the contract and had chosen not to obtain professional advice beforehand; there was no actionable misrepresentation and the vendor was entitled to the balance of £210,000 due to make the deposit up to the agreed 10%. 

The case is a useful reminder of the principles that apply when a buyer who has exchanged contracts changes their mind and decides not to proceed. It comes hot on the heels of observations made by the Supreme Court in Cavendish Square Holding BV v El Makdessi [2015] about whether deposits in excess of 10% may be unenforceable as penalties. 

This article considers the law as it stands in relation to the remedies available to the vendor when the buyer breaches their contract by refusing to complete – specific performance, rescission, together with forfeiture of the deposit, and a claim for damages. 

Specific performance 

Specific performance (SP) is the remedy most often sought by vendors of land. SP is, of  course, an equitable remedy and thus the court has a discretion whether or not to grant it. Although in principle SP is only available in cases where an award of damages would be inadequate, in land contracts the remedy is granted almost as right; in the vivid phrase used by Lindley LJ in Hope v Walter [1900] the vendor can ‘thrust the property down the purchaser’s throat’. Thus the vendor is able to rid themselves of the property and obviate the need to seek damages.

In these circumstances it is for the buyer seeking to avoid the order of SP to show that there is good ground for refusal. Generally speaking, it will only be refused in two categories of cases: firstly, if the buyer can establish that there has been misrepresentation by the vendor, or for mistake or misdescription; secondly, if the vendor does not have clean hands or is guilty of delay. 

Note, however, that the SCS (5th ed) address the remedies available for misdescription at clause 7 and limit the recourse available to a buyer. Clause 7 provides that where any plan, statement or negotiations leading to the contract are misleading or inaccurate due to an error or omission by the seller, the buyer will be entitled to damages if there is a material difference between the value or description of the property and that a buyer will only be entitled to rescind the contract where it results from fraud or recklessness or where they would be obliged to accept property which differed substantially from what they had been led to expect. It is therefore clear that where a sale is governed by the SCS the purchaser will only be entitled to avoid their obligation to complete where the error or omission is the result of fraud or recklessness, or the property differs substantially. 

There is, finally, a residual discretion to refuse SP in a case where it would cause great hardship to the buyer. In Patel v Ali [1984], the court explained the principle thus:

The important and true principle, in my view, is that only in extraordinary and persuasive circumstances can hardship supply an excuse for resisting performance of a contract for the sale of immovable property. A person of full capacity who sells or buys a house takes the risk of hardship to himself and his dependants, whether arising from existing facts or unexpectedly supervening in the interval before completion.

In that case, the court did find that the sellers would have suffered hardship were the sale to be enforced.

Rescission

A vendor will not be entitled to treat a contract as discharged unless the breach is such as to render further performance purposeless. This will be the case (Thompson v Corroon[1993]):

... where a party indicates either expressly or implicitly that he does not intend to complete his side of the contract or where, having regard to the contract as a whole, the obligation which is broken is of vital importance.

Once this happens, the contract is ended as regards further performance, but remains alive for the purpose of making an award in damages. In these circumstances the vendor may forfeit any deposit and sue for damages for any loss on resale that exceeds the value of that deposit. In Johnson v Agnew [1980] at 392-394 the House of Lords explained what is meant by ‘rescission’ in the context of breaches of contracts for the sale of land:

it is important to dissipate a fertile source of confusion and to make clear that although the vendor is sometimes referred to in the above situation as ‘rescinding’ the contract, this so-called ‘rescission’ is quite different from recession ab initio, such as may arise for example in cases of mistake, fraud or lack of consent. In those cases, the contract is treated in law as never having come into existence… In the case of an accepted repudiatory breach the contract has come into existence but has been put an end to or discharged. Whatever contrary indications may be disinterred from old authorities, it is now quite clear, under the general law of contract, that acceptance of a repudiatory breach does not bring about ‘rescission ab initio’.

Forfeiture of the deposit

Deposits which are, in the old language, ‘an earnest for performance of the contract’, may be forfeited and kept by the vendor on the buyer’s breach of contract, even if the sum of money retained exceeds the loss the vendor actually suffers. That is because the vendor has (in the language of the Supreme Court in Cavendish) a legitimate interest in performance of the contract. Section 49 of the Law of Property Act 1925 gives the court discretion to order repayment of any part of the deposit, which discretion cannot be excluded by agreement between the parties. The statute provides that:

  1. A vendor or purchaser of any interest in land, or their representatives respectively, may apply in a summary way to the court, in respect of any requisitions or objections, or any claim for compensation, or any other question arising out of or connected with the contract (not being a question affecting the existence or validity of the contract), and 
    the court may make such order upon the application as to the court may appear just, and may order how and by whom all or any of the costs of and incident to the application are to be borne and paid.
  2. 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.
  3. This section applies to a contract for the sale or exchange of any interest in land.

The application of s49 is explained by the Court of Appeal in the leading case of Midill (97PL) Ltd v Park Lane Estates Ltd [2008]. In that case the purchaser entered into a contract to purchase all of the shares in a company whose only asset was a property for £4m. A 10% deposit of £400,000 was paid, together with a second instalment of £800,000. The purchaser was unable to pay the balance at completion and the seller rescinded the contract, repaying the second instalment of £800,000 but not the deposit of £400,000. The purchaser’s application for an order under s49(2) for repayment of the deposit was refused by the trial judge and its appeal was dismissed. The Court of Appeal observed that deposits should not normally be ordered to be repaid and that inability to complete was exactly the risk the deposit was intended to guard against.

However this only applies to ‘standard’ deposits, which in this jurisdiction are 10%. The decision of the Privy Council on an appeal from the Court of Appeal in Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd (Jamaica) [1993] is instructive. The facts were that the customary deposit in Jamaica had been 10%, but that had sometimes been increased to 17.5% after a particular tax statute came into force. The property in question was sold by the bank at auction with a deposit of 25%. The purchaser, Dojap, failed to complete and claimed the return of the deposit. Dojap failed at first instance but was partially successful in the Court of Appeal, to the extent that the bank was ordered to return the deposit to the extent that it exceeded the normal 10%. The Privy Council allowed Dojap’s appeal and ordered the bank to return the whole of the deposit. The board observed that the special treatment afforded to deposits was plainly capable of being abused:

if the parties to a contract, by attaching the label ‘deposit’ to any penalty, could escape the general rule which renders penalties unenforceable.

The board then referred to the fact that the customary deposit was 10% and said that a seller who seeks to obtain a larger amount by way of a forfeitable deposit must show special circumstances which justify such a deposit. There were on the evidence no special circumstances in this case.

The law on the return of deposits is now best summarised by Lord Hodge in Cavendish at para 283:

I conclude therefore that in both English law and Scots law (a) a deposit which is not reasonable as earnest money may be challenged as a penalty and (b) where the stipulated deposit exceeds the percentage set by long established practice the vendor must show special circumstances to justify that deposit if it is not to be treated as an unenforceable penalty.

Damages

The vendor is, finally, also able to obtain damages. The measure of such damages is the loss to the vendor arising out of the purchaser’s non-performance of the contract. A vendor may be entitled to recover the following from a defaulting purchaser:

  • the diminution in value of the property from the contractual price;
  • any wasted expenditure on the transaction; and
  • ongoing liabilities in respect of the property that would otherwise have ceased.

The compensation that a vendor might be entitled to may vary depending on the date on
which the court assesses the damages. In Wroth v Tyler [1974], the court held that damages should be assessed as at the date of the hearing, rather than the earlier date of the breach. However, the courts have discretion to select another date. In Malhotra v Choudhury[1980], although the court accepted that the assessment should be at the date of the judgment, the date for valuing the property was moved back by a year to take account of the claimant’s delay in commencing proceedings.

In an uncertain property market, the decision in Hooper v Oates [2013] would rightly give a vendor in breach cause for concern. In this case, the purchaser had breached a contract for sale in 2008 and forfeited its deposit. The vendor continued to market the property but was unable to find another buyer and moved back into the property in 2010. By this time, the market value of the property had fallen substantially. The defaulting purchaser was found liable to pay compensation equivalent to the sum of the change in the value at the point at which the vendors had stopped trying to sell the property as against the value of the property at the time when the buyer pulled out of the sale.

In general, however, so far as land transactions are concerned, the advice ‘buyer beware’ remains good: given the range and strength of remedies available to a vendor, a buyer must be very careful before they decide to refuse to complete – as Mr Griffiths found out to his cost.

This article was first published in Property Law Journal (July/August 2016) and is also available at www.lawjournals.co.uk.