In brief - NSW Supreme Court does not allow vendor to retain deposit
In July 2014, the NSW Supreme Court determined in the matter of Chambers v Borness  NSWSC 890 that even though the vendor had validly terminated a contract, he could not keep the whole of the deposit paid by the purchaser.
Purchaser unable to complete and vendor terminates contract
In this matter the purchaser, Ms Chambers, sought to acquire a property for $2,971,000.
The purchaser was unable to settle and the vendor, Mr Borness, issued a notice to complete.
The time for settlement was extended on a number of occasions but ultimately the vendor terminated the contract.
The purchaser was allowed into occupation under licence four weeks after exchange. She effected repairs and improvements to the property and paid a licence fee between exchange and settlement. When the contract was terminated, the licence was also terminated.
The contract stated that if the contract came to an end, the purchaser could not claim from the vendor the cost of the improvements.
In addition, pursuant to the licence arrangement, the purchaser paid all rates, taxes, levies and other outgoings for the property.
Pursuant to the contract a 15% deposit was paid and released to the vendor.
Vendor seeks recovery of full deposit
The vendor commenced proceedings to claim the full deposit.
Whilst the purchaser acknowledged that the vendor had validly terminated the contract, the purchaser maintained that the court should exercise its discretion in accordance with section 55(2A) of the Conveyancing Act and not allow the vendor to retain the deposit.
This section states that the deposit is forfeited unless the court feels that it is unjust or inequitable to permit this. Previously courts have held that the court should not exercise its discretion merely because the forfeiture of the deposit represents a windfall to the vendor.
Purchaser argues deposit should be refunded because of benefits received by vendor
The purchaser maintained that the deposit should be refunded because it would be unjust to forfeit it to the vendor due to the following benefits that the vendor had received or was entitled to:
- The vendor received licence fees totalling more than $70,000.
- The purchaser had expended $105,000 in improvements to the property.
- The purchaser had paid rates, taxes and outgoings in respect of the property during her occupation.
- The value of the property was $400,000 greater than at the date the contract was entered into.
- The vendor was entitled to the agreed interest under the contract for the delay in settlement (over $71,000).
- The vendor had claimed (and the purchaser acknowledged that the vendor was entitled to) other damages in excess of $95,000.
- The vendor had had the benefit of the deposit since exchange. If it had been invested, the interest earned was acknowledged to be approximately $60,000.
Court discounts improvements and increase in value of property
The court felt that most of these items were in fact real benefits to the vendor. With regard to the improvements, these were discounted as the court held that these were mainly a matter of taste. Further, the special conditions clearly indicated that the vendor would not be called upon to contribute for these works if the contract came to an end for any reason.
The court also discounted the increase in value as a factor that the courts should consider.
Court determines it would be unjust for vendor to retain entire deposit
However, the court felt that all of the other categories were real benefits to the vendor to the extent that they were paid or were payable. The court therefore stipulated that the vendor was not entitled to retain the deposit, as it would be unjust because it would give rise to an outcome that was so economically lopsided that the court would be required to exercise its discretion to ensure that this did not occur. The disparity between the financial position of the parties was too great if the deposit was forfeited.
However, the amounts which the vendor was entitled to, but had not yet recovered or received (damages of approximately $95,000 and the interest pursuant to the contract) were deducted from the deposit and the balance was refunded to the purchaser.
The court indicated that in any event, the vendor would only have been entitled to retain 10% of the purchase price and would have been required to refund the other 5%.
Deposit of more than 10% on a property purchase constitutes a penalty
Interestingly, the argument does not seem to have been raised that, in accordance with previous decisions, payment of a deposit of more than 10% constitutes a penalty and therefore the whole of the deposit should have been refunded.
Make sure your contract specifies clearly what happens if the contract is terminated
Where you enter into a contract, especially where a purchaser is to be given access or occupation, you need to be clear what the rights of the parties are if the matter comes to an end and what damages or payments the innocent party is entitled to.
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.