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Losing your deposit

December 15th, 2011

I always thought that everyone knew that if you exchange contracts and then fail to complete the purchase you will lose your deposit. Well, there have been two interesting cases relating to deposits decided in the High Court and Court of Appeal in the last few weeks.

In the first case, Amble Assets LLP v Longbenton Foods Limited, Amble was a food processing company in administration. The administrators marketed the business for sale as a going concern and accepted an offer from Longbenton. Longbenton was not able to complete immediately and so Amble’s administrators agreed a deferred completion. They permitted Longbenton to occupy Amble’s premises and operate the business on payment of a deposit amounting to 10% of the value of the property and 50% of the value of the processing equipment. The contract provided that the deposits would be forfeit if the Longbenton did not complete the purchase.

Even with a delayed completion, Longbenton was unable to complete the purchase. Amble’s administrators rescinded the sale agreement and forfeited the deposit, following which Longbenton itself went into administration.

Longbenton’s administrators applied to the court seeking the return of the deposit. The analysis of the nature of a deposit by Andrew Sutcliffe QC, sitting as a judge of the High Court, is interesting.

It is often considered that a deposit paid on exchange of contracts for the purchase of property would, but for the fact that 10% of the purchase price is considered to be a “genuine pre-estimate of loss”, be a penalty and therefore unenforceable. However, in the Amble case the judge reviewed many decisions of the courts and came to a different conclusion. This is that a deposit is paid under a contract as a means by which a buyer can demonstrate to a seller that it has a genuine commitment to complete the contract. The forfeiture of the deposit following non-completion arises under a provision in the contract that in that event the deposit will be forfeit, and is not a penalty for breach of contract.

Section 49 of the Law of Property Act 1925 gives the Court the power to order relief from forfeiture, a power which it may exercise if it considers that, in all the circumstances, the amount of the deposit was unreasonable. It seems clear from the judge’s ruling that the courts will resist attempts to argue that the traditional 10% deposit is unreasonable.

The second case is Samarenko v Dawn Hill House Limited, decided by the Court of Appeal on 1 December 2011. In this case contracts had been exchanged for the sale and purchase of a property, but with the unusual provision that the deposit was to be paid at a later date. That date passed. The deposit was not paid. The seller’s solicitors gave notice requiring the deposit to be paid within 7 days, making time of the essence. The deposit was not provided by that deadline, and 5 days later the seller notified the buyer that he accepted the buyer’s repudiatory breach of contract and terminated the contract with immediate effect.

The Court of Appeal agreed with the seller that the buyer’s failure to pay the deposit on time amounted to a repudiatory breach of contract, Lord Justice Lewison stating:

“Since the payment of a deposit at the executory stage of the contract is an earnest (or guarantee) of further performance, it is no surprise that a failure to pay the deposit on time is taken to demonstrate that the buyer is unwilling to perform the contract as a whole

 

Cases:

Amble Assets LLP v Longbenton Foods Limited [2011] EWHC 1943 (Ch)

Samarenko v Dawn Hill House Limited [2011] EWCA Civ 1445