It is common for vendors to agree on the payment of a 5% deposit for properties sold at auction and for properties in a high price bracket.

If the Contract proceeds to completion, the remaining 5% deposit is paid as part of the balance price payable on completion.

But if the Contract is terminated because of the purchaser’s default, then the vendor will need to recover the remaining 5% deposit (if it is unpaid) from the purchaser.

In this situation, a vendor can strike trouble: if they are not protected properly in the Contract; or if it is unjust or inequitable to recover the deposit.

The Supreme Court of New South Wales explored this situation in Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd (No 2) [2017] NSWSC 866 (Darke J).

The Rushcutters Bay Developments Contract for Sale and its variations

The Contract was for the sale of four commercial strata lots at Rushcutters Bay, Sydney, for a price of $16 million. The contract provided that the 10% deposit payable of $1.6 million could be paid by two instalments, namely $200,000 on the exchange of Contracts on 27 August, 2015, and $1,400,000 on 30 September 2015. The Contract was a delayed completion Contract, with a completion date of 31 March 2016.

Neither the date for the payment of the second instalment of the deposit, nor the completion date were observed, because the vendor had difficulty in obtaining the funds to pay the deposit and the finance to pay the balance purchase price.

From October 2015 until June 2016, a total of five Deeds of Variation were entered into, which resulted in: (a) the payment of further instalments of the deposit; (b) an increase in the price; (c) a partial settlement for two lots; and (d) the extension of the completion date. The deeds were entered into after they were negotiated and drafted by the parties’ solicitors.

Under the Fifth Deed of Variation, $3.5 million of the deposit paid was apportioned as the full price payable for two lots. The remaining $325,000 of the deposit paid was applied towards the deposit payable for the remaining two lots. For these two lots, the deposit was payable was $2,637,500, and the Contract price was $12,625,000.

The vendor terminated the Contract for the remaining two lots on 22 July 2016, based on the failure by the purchaser to pay the instalments of the deposit payable under the Fifth Deed of Variation.

The vendor instituted legal proceedings to recover the unpaid deposit, namely $2,312,500.

Recovery of the unpaid deposit – did a limit of 10% of the price apply?

The vendor’s solicitor took care to draft the Deeds of Variation to try to preserve the vendor’s rights to recover the deposit payable (but unpaid), over and above 10% of the price. As we will see, they failed.

The basic provision is clause 9 of the printed conditions in the Contract:

9.     If the purchaser does not comply with this contract … in an essential respect, the vendor can terminate by serving a notice. After termination the vendor can –

9.1  keep or recover the deposit (to a maximum of 10% of the price)

Because the deposit payable for the two lots which had not been settled was $2,312,500, which exceeded 10% of the agreed price of $12,625,000, the Fifth Deed of Variation, contained these additional provisions:

3.2    The Vendor and Purchaser acknowledge and agree that:

(a)  the deposit exceeds 10% of the price under the Contract;

(b)  if for any reason any portion of the deposit exceeding 10% of the price (Excess Portion) is considered not to be properly part of the deposit, then the Purchaser acknowledges and agrees that the Excess Portion is a genuine pre-estimate of the damages that the Vendor will suffer from the loss of the Contract.

3.3    The Purchaser acknowledges that:

(a)  usually on termination of a contract for the sale of land in New South Wales by a vendor for a purchaser’s default the vendor is entitled to retain the deposit of 10% of the price; …

and the Purchaser agrees not to challenge or object to the retention of the Excess Portion as a pre-estimate of damages.

The Court stated that “Clause 9.1 plainly imposes a maximum of 10% of the price upon the amount of the deposit the vendor may keep or recover”. Clause 9.1 was varied by clause 3.2 of the Deed, but clause 3.2 did not increase the 10% limit for the deposit, and clause 3.3 of the Deed stated that the vendor was entitled to “retain” the deposit paid, not to recover  the amount payable above 10%.

Therefore, the limit for recovery of 10% of the price in clause 9.1 remained unvaried, and the vendor was limited to recovering $1,262,500 less $325,000 paid, namely $937,500.

Comment: A deposit of 10% of the price is a customary not a legal requirement. Deposits can be any amount. In this case, the vendor’s recovery was limited to 10% because instead of describing the whole amount payable as a deposit, the vendor’s solicitor described the amount over and above 10% of the price as a “pre-estimate of damages”.

Relief against forfeiture – Section 55(2A) of the Conveyancing Act 1919

Section 55(2A) provides:

… in any proceeding for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit with or without interest thereon.

The Court applied this test to the exercise of the Court’s discretion: Is it unjust and inequitable to permit the vendor to retain the deposit?

The Court concluded that for these reasons it was not just and inequitable for the vendor to recover the deposit up to 10% of the price:

  • No false or misleading statements were made by the selling agents about extensions of time for completion, or about the value of the properties.
  • The agreed prices for the properties were not excessive – the re-sales after termination of the Contract were at higher prices. The vendor sold the remaining two lots at a profit - for $16.5 million. The purchaser also sold one of its lots for a profit.
  • The purchaser entered into the Contract, well aware that it risked losing a 10% deposit. The purchaser had the benefit of legal advice throughout, and was in a position to adequately protect his interests.
  •  The purchaser’s defaults which led to the termination of the Contract were not brought about by the conduct of the vendor.

The Court speculated that the position would have been different had the Contract allowed the vendor to keep or recover about 21% of the price i.e. the whole of a stipulated deposit:

“This is because the principal reason which might justify such a large deposit, namely, the risk of very substantial loss to the vendor if the purchaser fails to complete, no longer exists.”

This observation suggests that if the vendor under a terminated contract re-sells the property at a profit, then the Court may be prepared to grant relief against forfeiture of the deposit if, with other circumstances, there is no injustice or inequity to the vendor.

Comment: In answer to a claim made by a vendor for the recovery of a deposit, the purchaser will be well-advised to make a cross-claim for relief against forfeiture, for the Court to exercise its discretion under section 55(2A). The Court will consider the surrounding circumstances in deciding whether or not to exercise its discretion.