Deposits - Payback time?

Deposits - Payback time?

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Author: Kate McCall

Applies to: England and Wales

The payment of a deposit provides a financial incentive for a buyer to complete a purchase of property, but what rights does a buyer have to the return of the deposit should the buyer fail to complete the purchase?

If, having exchanged, the buyer fails to complete, the usual position is that the buyer has no right to return of the deposit it paid on exchange. The buyer who has failed to complete can ask the court to order the return of the deposit to it and the court has a discretion to do so 'if it thinks fit' under section 49(2) of the Law of Property Act 1925. However the court will only order the return of the deposit in exceptional circumstances.

The recent case of Solid Rock Investments UK Ltd v Reddy (2016) serves as a reminder of the factors that the court will take into account when considering applications under section 49(2).

In this case, the buyer had agreed to buy a property for £430,000, and had paid a 10% deposit. The buyer had difficulties obtaining the transfer of funds from overseas in time for completion, and told the seller of this a week before completion. The seller offered to extend the completion date but after no response was received from the buyer the seller served a notice to complete. On the expiry of that notice the seller rescinded the contract. On the following day, the buyer indicated it could pay the purchase price, interest and costs, and complete but the seller insisted that it had rescinded the contract. It later sold the property to a third party at an increased price as the likelihood of obtaining planning permission had improved. The original buyer applied for return of its deposit under section 49(2) but this was refused by the court.

The buyer appealed on the basis that the court had failed to take into account two factors: the economic benefit to the seller of rescinding, and the buyer's offer to complete with interest and costs.

The appeal was refused and some important points on the return of deposits under section 49(2) were highlighted in the decision:

  • There needs to be something special or exceptional to override the normal position that a seller can keep the deposit if the buyer does not complete. The fact that the seller had suffered no loss is not in itself a sufficient ground to order the return of the deposit.
  • The economic impact on the seller is, however, a factor that can be taken into account in considering whether there are exceptional circumstances.
  • It is relevant to consider how close the buyer came to completing and any alternatives that it proposed but where the buyer simply could not perform the contract or offer any alternative, the deposit would not normally be returned.
  • It is also relevant to consider whether the seller has caused or contributed to the failure to complete.

There is no requirement for a buyer to pay a deposit on a purchase, but where one is agreed, it is important for buyers to remember the nature of a deposit as a guarantee of performance.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

About the Author

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Kate McCall

Partner

03700 86 4238

Kate is a partner in our real estate team. She deals with all types of property litigation work from the provision of pre-emptive advice and risk analysis through to complex proceedings in the Court of Appeal and Supreme Court. Kate acts for institutional landlords, developers, investors and corporate occupiers across the entire property sector.

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