​Legal Q&A: Can you keep a deposit if your buyer does not settle on a contract?

By
04/12/2014

Despina Priala explains whether or not a seller can keep a deposit if the buyer does not settle on a contract

Q: We have recently taken a deposit for the purchase of our investment property. The deposit amounts to 10% of the agreed sale price, approximately $75,000. The settlement date has come and gone around four weeks ago, and the purchaser has indicated that they are unable to settle yet due to difficulties in raising the necessary finance. We think there’s a possibility they may not be able to settle at all.

Under the contract we are entitled to a payment of deposit/365 for every day delayed from the agreed settlement date if they do settle, and retention of the deposit if they are unable to settle. This seems straightforward, but are there any circumstances in which this may not apply? For example, is there a chance they could get their deposit back? This is really inconveniencing us; we feel like we can’t even look for another investment property till we get the full amount.

A: The answer is never straightforward when it comes to legal matters. However, this article is designed to help you understand why, and the possible options available to sellers in these circumstances. One major factor that comes into play is whether time is of the essence under the relevant contract. Why is this important? Because if time is of the essence and a party fails to perform an obligation (in this case fails to settle), then the other party can require them to perform it and take the necessary steps if they do not.

In NSW the standard terms of residential contracts of sale do not provide for time being of the essence; however, in Queensland they do. Of course, parties can agree to change the terms of a contract to allow for time being of the essence. But normally the lay person is not legally savvy, and will not know this is relevant, nor are they expected to. This is a very good reason why buyers and sellers should always be properly represented.

Let’s assume for the purposes of this article that, in the contract concerned, time was of the essence. (To explain what would occur if time was not of the essence would require a whole new article.)

If time was of the essence, and the buyer failed to settle, which is considered a fairly fundamental requirement under any contract, then normally the seller would have legal recourse available to them under the standard terms of contract. This would include choosing whether to terminate the contract or affirm the contract.

When a seller chooses to terminate a contract, they may do any or all of the following: (a) resume possession of the property; (b) forfeit the deposit; (c) sue the buyer for damages; or (d) resell the property. If a seller chooses to affirm a contract, they may sue the buyer for damages, or for specific performance (that is, to force the buyer to settle), or both. This is in addition to any other rights available to a seller under common law.

However, before a seller can actually take advantage of these remedies, the seller must first prove that a) the buyer was actually in default, and b) that proper notice of such default and breach of contract was given to the buyer by the seller. This is where any seller can get tripped up as there are certain legalities and technical rules that must be followed in order for a seller to validly forfeit a deposit from a buyer.

In this instance, the circumstances seem to imply that the settlement date came and went, and no steps were taken by the seller on the settlement date, or immediately thereafter. Some time has passed before the seller has taken any steps to enquire whether the deposit can be kept. Unfortunately, the seller’s conduct, or lack thereof since the settlement date, may mean that time is no longer of the essence, or that the seller has somehow waived certain legal rights normally afforded them.

Not all is lost, though. What the seller needs to do here is simple. They should obtain legal advice from a property lawyer and provide all of the relevant information, including a copy of the contract, and the facts about what has occurred and when (giving dates, times, etc.). If the contract contains a specific clause regarding the deposit and rights to retain this deposit in certain circumstances, then it will be critical to review that contract and the actual drafting of this condition. Only then can the seller receive legal advice as to what steps he or she may take to either formally terminate the contract, keep the deposit and attempt to resell the property, reserving any rights to sue the buyer for damages; or to affirm the contract.

Each case is different and must be assessed on its merits, according to the facts as they are presented. The devil is in the detail, as they always say.

Disclaimer: The information in this article is of a general nature only and should not be relied upon as legal advice. You should seek advice for your particular circumstances before entering into any transaction.

 
Despina Priala is principal at Priala Legal.


This feature is from Your Investment Property Issue #88. Buy the copy to read more!





 

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