In present times, the instances of transactions failing to complete is on the increase. Due to rapidly changing economic circumstances parties may suddenly find themselves in a very different financial position to when they entered into an agreement to purchase.
What happens when a deposit is paid by a party who enters into a contract to purchase land, but then fails to complete the transaction in accordance with its contractual obligations? Is the purchaser entitled to have the deposit back, especially if the seller goes on to sell the property at the same price or even at an increased price? A recent case1 has made it clear that this will not be the case unless there are exceptional circumstances.
Section 49(2) Law of Property Act 1925 – The Court’s Discretion
Section 49(2) Law of Property Act 1925 (“LPA 1925”) provides the Court with a discretion to order the seller to return the deposit paid to it by the potential purchaser. Prior to the LPA 1925 there was a long established principle that if a deposit was paid on the sale of land and then there was failure to complete on the part of the purchaser, this resulted in the deposit being forfeited and the court had no power to grant any relief. Following the enactment of Section 49(2) the important question became under what circumstances will the Court exercise this discretion? Some have argued that there should be a liberal exercise of the discretion, as the retention of the deposit is akin to a penalty. However, the recent case of Midill has established guidance that this will not usually be the case.
Previous Case Law
The previous case law did not provide a clear picture. Some cases suggested that there should be a liberal approach and others provide for a much more restrictive interpretation of the discretion. This made it difficult to predict the outcome of any litigation on the subject. There were some indications that where the seller did not suffer any loss, then the Court could exercise its discretion to order the return of a deposit to the purchaser. However, in a recent case2 the Court held that its discretion should only be exercised in exceptional circumstances and based its decision on the need for certainty and the common knowledge that a deposit is likely to be forfeited.
Midill v Park Lane Estates – The Facts
Midill entered into an agreement to buy all the shares of Park Lane Estates, whose sole asset was a property. The agreed purchase price was £4 million and a deposit of £400,000 was paid. When Midill failed to complete Park Lane issued a notice to complete. However, it was still unable to complete and the contract was rescinded. Park Lane then went on to sell the property to another unconnected party for an increased premium of £4.3 million. However, Park Lane retained the deposit and did not repay it to Midill.
Understandably, Midill sought to reclaim the £400,000, arguing that the Court should exercise its discretion and order that the defendant should not be allowed to retain the deposit. It based its arguments on the fact that Park Lane had not suffered any loss, as it had sold the property for an increased amount.
First Instance Decision
In the High Court, the Judge decided that this case was not an instance where his discretion should be exercised to order the repayment of the £400,000. He believed that too much uncertainty would be created if the basis of the exercise of the discretion was dependant upon the potential resale of the property.
Court of Appeal
In the Court of Appeal, Midill argued that the High Court Judge had taken an overly restrictive view of the Court’s ability to exercise its discretion under s.49(2) and that the discretion should be exercised in any circumstances where it is the fairest course of action between the parties.
The Court of Appeal, however, agreed with the lower court and held that this was not a case where the discretion should be exercised. The Court stated that generally there must be some special or exceptional circumstances to justify overriding the party’s ordinary contractual obligations. The fact that the property was later sold to another party at an increased price did not constitute such exceptional circumstances. To have held so, would have created too much uncertainty.
The decision in Midill has established some clearer guidance on the exercise of discretion by the Court under Section 49(2) LPA 1925. The Court will not exercise its discretion as a matter of course and rather exceptional circumstances will be required. It appears that the fact the seller suffers no loss as a consequence of the purchaser’s breach of contract in failing to complete will not be sufficient exceptional circumstances.