Australia: Reduced deposits, and obligations of the vendor to permit access

IN BRIEF - LESSONS FOR PURCHASERS AND VENDORS REINFORCED IN SIMCEVSKI V DIXON

The decision in the Victorian case of Simcevski v Dixon (No.2) [2017] VSC 531 is instructive on two fronts. The first relates to the notion of penalties where part of a deposit is sought to be recovered by a vendor following a purchaser's default. The second relates to the extent of vendors' obligations to provide access to premises for various purposes to purchasers once the contracts have been exchanged.

COURT FINDS THAT FURTHER 5% DEPOSIT IS IRRECOVERABLE BY THE VENDOR

This case involved a situation where a purchaser paid a 5% deposit on exchange, where the contract had the often seen clause requiring payment of a further 5% deposit on settlement or on default by the purchaser. The purchaser had difficulty arranging finance and ultimately the contract was terminated by the vendor.

The first area to be considered by the Court was the issue of the deposit and whether, following termination of the contract by the vendor (which the Court held was valid), the vendor was entitled to claim a further 5% or the purchaser was entitled to the initial 5% deposit to be refunded.

On the vendor's claim, the Court held that the requirement in the contract for the purchaser to pay a further 5% deposit on default was void as being a penalty.

In line with a long list of cases in various jurisdictions in Australia and in the United Kingdom, the deposit was held to be an earnest of performance of the purchaser's obligations, that the type of provisions similar to the one in this contract were a penalty because they bore no relation to the damages or interests of the innocent vendor, and therefore was irrecoverable by the vendor as an unenforceable penalty.

NO EXCEPTIONAL CIRCUMSTANCES FOUND TO JUSTIFY REFUNDING PURCHASER 5% DEPOSIT

The purchaser then mounted two arguments with respect to the refund of the initial 5% which it had paid.

The first was that, as the clause relating to the payment of the further 5% on default was a penalty, effectively this made the whole notion of payment of deposit a penalty and the contract was effectively void. The Court gave this argument short shift stating that a deposit is always an earnest for binding a purchaser to its obligations under the contract and that the unenforceability of the clause requiring payment of the further 5% on default did not in any way affect the validity of the vendor's entitlement to the initial 5%.

The second was that the purchaser sought the exercise of the Court's statutory discretion to refund the 5% deposit where the Court feels that, in the interests of justice, the deposit should be refunded notwithstanding the purchaser's default.

The approach taken in this matter was that the Court had to have regard firstly to the nature of the deposit as an earnest for performance of a purchaser's bargain and that, if this was not upheld, then it would have significant commercial ramifications with regards to the entering into of contracts for the sale of real estate.

Basically, for the deposit to be repaid to the purchaser in exercise of the Court's discretion there has to be exceptional circumstances. Otherwise, this would be a departure from the notion that the deposit holds the purchaser to performance of his obligations under a contract for sale of land. The Court should not consider the forfeiture of a deposit as a windfall to the vendor and this is not a proper consideration for the Court to have in exercising its discretion.

The Court found that the real reason this matter did not complete was that the purchaser could not raise finance. As there were no circumstances justifying the exercise of the Court's discretion, the vendor was entitled to retain the initial 5% deposit.

VENDOR NOT OBLIGED TO PERMIT ACCESS FOR PURPOSE OF VALUATIONS OR INVESTIGATIONS

An interesting side note to this case was the issue of access claimed by the purchaser. The purchaser indicated that the reasons it did not get finance were that it did not get appropriate access for the purposes of carrying out valuations and, in particular, could not get access to carry out subterranean investigations on contamination as supposedly required by his financier.

The Court held that the risk of pollution on the land was known at the time of entering into the contract and was in fact acknowledged in the special conditions.

The vendor had no obligation to permit access for the purposes of valuations or investigations at general law, and was not required to assist the purchaser to do things necessary for the purchaser to obtain its finance.

The vendor's refusal to give the purchaser access on the terms the purchaser wanted (although the vendor did agree to access on different terms which were not acceptable to the purchaser) did not create any issues for the vendor in this case.

LESSONS FOR VENDORS AND PURCHASERS FROM DECISION IN SIMCEVSKI V DIXON

As we have stated previously, the law in our view is now fixed.

If you accept a deposit of less than the normal 10% and the purchaser defaults, you have no legal entitlement to any other payment as the courts will hold it to be a penalty. If you accept, for example, a 5% deposit, then the courts are of the view that the parties have agreed that this lesser deposit is a sufficient earnest accepted by the parties to bind the purchaser to the contract and, in the event of default, the purchaser only forfeits a 5% deposit (subject to, of course, the vendor's entitlement to claim any loss on re-sale in excess of that 5% paid).

The second lesson from this case is that if you need or want (or suspect that you will need or want) rights of access to the property between exchange and settlement, then this must be enshrined in the contract. The courts will not seek to impose upon vendors an obligation to make access available just because the purchaser needs it to comply with various requirements (particularly those of lenders) to put the purchaser in a position to effect settlement of the transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.