Quite often, we encounter circumstances where a purchaser, under an exchanged contract for sale of land, is unable to complete by the completion date specified within that contract. In those circumstances, the contract will usually stipulate that a seller is entitled to serve a notice to complete upon the purchaser specifying a period of time (as stated within the contract) in which the sale should complete or else the seller will be entitled to rescind the contract. If the seller elects to rescind the contract, following the failure to complete by the purchaser by the date specified within the notice to complete, the seller is entitled to retain the deposit monies paid.

Section 49(2) of the Law of Property Act 1925 (“LPA”) sets out circumstances in which a seller or purchaser may apply to court for the return of the deposit or some other form of compensation in respect of matters connected with a contract for sale of land.

1.             Background

In the case of Solid Rock Investments UK Ltd v Kamireddy Reddy, Nawkiran Reddy and Akbar Mussa [2016] EWHC 3043 (Ch) the High Court was asked, on appeal, to consider whether a deposit should be returned to the purchaser following its failure to complete a contract for sale of land following the service of a notice to complete.

The parties entered into a contract for the purchase of development land at a price of £430,000. The deposit under the contract was £43,000 and a completion date was set for 22 June 2015. On 15 June 2015, seven days before the contractual completion date, the seller's solicitor received a call from the purchaser's solicitor informing him that the purchaser might have difficulty in obtaining funds in time. The funds were being sourced from a Nigerian bank account. In response, an offer was made on 15 June on behalf of the seller to push back the completion date by two weeks to 6 July 2015 on terms that the purchase price would be increased by £10,000 to £440,000 and the payment of solicitor's fees of £1,250 plus VAT and reasonable disbursements. On 16 June 2015 the offer of extending the completion date by two weeks was revised on behalf of the seller on the basis that the purchase price would be increased by £5,000 and £1,000 plus VAT and reasonable disbursements would be paid to cover legal fees. No response was made on behalf of the purchaser to either of these offers.

On 22 June 2015, the date of completion, the purchaser failed to complete the contract and so the seller served a notice to complete requiring completion by 29 June 2015. The purchaser still did not complete, as it was not in funds from its Nigerian bank, and so on 30 June 2015, the seller’s solicitor sent an email to the purchaser’s solicitor rescinding the contract. On 1 July 2015, the purchaser’s solicitor contacted the seller’s solicitor stating that it was in funds and ready to complete. The seller’s solicitor responded stating that the contract was rescinded and the deposit had been forfeited.

2.             The Hearing

The purchaser issued an application under section 49(2) of the LPA for the return of its deposit. In doing so, it relied upon the following facts:

1.     It was in a position to complete only one working day after the expiry of the notice to complete

2.     When it offered to complete on 1 July 2015, the purchaser offered to complete with interest and costs

3.     Up until 30 June 2015, the seller had been ready, willing and able to complete

4.     The seller’s refusal to complete was unexplained

5.     The property had since been sold with the benefit of planning permission for £530,000 and so the seller would get a windfall if the deposit was not returned as it would get the £100,000 uplift in the value of the land as well as the purchaser’s £43,000 deposit

6.     The seller knew that the funds were being sourced from a Nigerian bank account and it had been appreciated from the outset that this may cause difficulties and that the purchaser may not be able to complete on 22 June 2015.

The seller relied upon the following facts in its defence:

1.     The purchaser was offered the chance to purchase a two week extension to the completion date by paying an increase in the purchase price

2.     There were no special or exceptional circumstances which existed to override the usual position that the deposit is retained by the seller where there is a failure to complete

3.     The delay on the part of the purchaser’s bankers was a matter between the purchaser and its bank

4.     If the purchaser had accepted the offer to extend the completion date, the seller would not have been able to rescind the contract before 6 July 2015

5.     No reasonable person, having the benefit of legal advice, would have assumed that if the offer remained unanswered that the seller would still agree to extend the time for completion.

3.             Decision

The High Court agreed with the court at first instance and stated that the purchaser was not entitled to the return of the deposit. In reaching its conclusion, and whilst it was acknowledged that the seller gained a windfall (which was not deemed to be a penalty payment, such a payment being unenforceable in English law), the court held that there were no special or exceptional circumstances which existed in this set of facts.

The purchaser was aware that there was a pending planning application when it entered into the contract for the sale of land. Although that was not concluded, it was aware that it may do so before completion and that the value of the land would then be enhanced. Had the sale completed, the purchaser would have received the benefit.

The court confirmed that, whilst fact specific, the circumstances under which a deposit for a contract for sale may be returned are where a seller had delayed in providing responses to questions raised or where there were title issues which could not be resolved. This list is non-exhaustive but the circumstances would have to be exceptional.

4.             Practical Considerations

1.     If you are entering into a contract for sale, it’s prudent to ensure that all of the necessary funds to complete are in place prior to the exchange of contracts.

2.     If you cannot complete by the agreed purchase date, consider making an offer to extend the deadline. This may be done as seller or purchaser.