Who is really entitled to the deposit when the sale to purchase immovable property does not proceed?

One of the most contentious issues in purchasing an immovable property today is if the sale does not proceed, does the seller or purchaser have the right to the deposit? The answer to this question is not that easy or as simple as many sellers, buyers and estate agents wish to believe.

In the recent case of Royal Anthem Investments 129 (Pty)Ltd v Yuen Fan Lau (941/2012) (2014) ZASCA 19 (26 March 2014), this point was decided on in the Supreme Court of Appeal. In this case, as is most common with offers to purchase immovable properties, the sale was dependent on the purchasers being approved for the purchase amount or part thereof. The purchaser was not approved for such finance, and both the seller and purchaser declared that they were entitled to the deposit. The Judge’s ruling in respect to the deposit turned on the wording and interpretation of the breach/penalty clause of the agreement, and emphasized the importance of using the correct wording in such clause to ensure that it embodies the interpretation the parties have of such clause, and that the clause complies with the applicable laws. The Judge ruled that, due to the manner in which the agreement was drafted and in particular the breach clause, the deposit had to be returned to the purchaser with interest.

According to South African Law of Contracts, it is an accepted principle that the non-compliance with a clause contained in an agreement places an obligation on both parties, in this situation the seller and purchaser, to restore each other to the position they were in immediately prior to the conclusion of the agreement. Based on this principle, many purchasers believe, if the sale does not proceed, due to their inability to obtain finance, then the deposit will automatically be returned to them. Unfortunately for the purchaser it is not as simple as that. Our law also allows for parties to an agreement, to exclude the duty to restore on the parties, but then such exclusion mostly gives rise to a penalty or liquidated damages clause, which is subject to the Conventional Penalties Act 15 of 1962 (“the Act”).

In terms of Section 3 of the Act:

“If upon the hearing of a claim for a penalty, it appears to the Court that such penalty is out of proportion to the prejudice suffered by the creditor (purchaser) by reason of the act or omission in respect of which penalty was stipulated, the Court may reduce the penalty to such extent as it may consider equitable under the circumstances. Provided that in determining the extent of such prejudice the Court shall take into consideration not only the creditor’s proprietary interest, but any other rightful interest that may be effected by the act or omission in question.

From the seller’s point of view, the Court can take into account not only any financial loss but any pain and suffering which the seller may have suffered, due to stress and anxiety, caused by the cancellation. Due to the subjective wording of the Act this means that a penalty enforced by the Judge could be higher than the actual loss suffered. From the Purchaser’s perspective it means that any deposit cannot simply be retained by the seller, without such seller having to quantify his damages as result of such cancellation.

The Act, by balancing the rights to some extent of the seller and purchaser to the deposit, now places the Conveyancer in the position, if there is a conflict in respect to retaining or paying over the deposit, then such disputed amount should be placed, in an interest bearing account, until either the seller and purchaser have reached agreement thereon or alternatively there is a Court Order in respect to such deposit. This definitely changes the previous view of many sellers, that the Conveyancer is ‘’their Attorney”’, and accordingly “takes instruction from them”.

Some Attorneys are of the view, that in order to get around the issue of the seller being able to retain the entire deposit paid by the purchaser and not having to quantify their loss, that an agreement should be drafted, in which the purchaser has an option to purchase the property, and the purchaser pays an amount for such option. The option Agreement would then provide that if the option is exercised, the amount paid for the option will be deducted from the purchase price. Whilst if the transfer does not proceed, then the option amount will be retained by the seller, as such agreement, is not considered to contain a penalty clause in terms of the Act. Realistically the option Agreement does not place either the seller or purchaser in the perfect position. The seller does not know if the purchaser intends to exercise such option, until the option expires, and the purchaser will forfeit the option amount, no matter the reason for his inability to exercise the option.

The question of who the deposit belongs to is fraught with complexity and considerately depends on the wording of each offer to purchase.

by Natalie Bailey