Australia: When is a provision allowing a seller to keep a deposit a penalty?

HG Property Litigation Alert: 15 July 2015

Recently we published an article discussing a case where the seller of a property was entitled to keep a $139,000 deposit when the contract of sale failed to settle (see " What happens to a deposit if the buyer is declared bankrupt before settlement?"). As that case and many others of its kind suggest, a contract of sale must be carefully drafted to ensure that you (whether as seller or buyer) are in a favourable position with respect to the deposit if the contract fails to settle.

This is particularly important when the contract provides for the deposit to be paid in instalments. In some cases where a deposit is paid in instalments, a Court could find that the later payments may need to be refunded to the buyer should the contract be terminated.

In the following Alert, Special Counsel Anthony Pitt and Solicitor Borcsa Vass explain a recent decision which provides some guidance on what is to happen with a deposit payable in instalments when the contract is terminated.

Rana v Dalla Costa [2014] NSWSC 1113

In Rana v Dalla Costa, the Court considered whether the requirement to pay the second half of the deposit constituted a penalty in circumstances where the contract was terminated.

Ms Dalla Costa (Seller) entered into a contract (Contract) with Mr Rana and Mr Bousaleh (Buyer) for the sale of a property located at Hamilton (Property). The sale price for the Property was $1,250,000; and the deposit was $50,000.00, which was payable by $25,000.00 on exchange, and the remaining $25,000.00 payable 70 days later.

A brief timeline of what occurred is as follows:



19 April 2011

Contract signed

First half of the deposit of $25,000.00 paid

May 2011

Keys to the Property given to the Buyer pursuant to a special condition of the Contract

28 June 2011

Second half of the deposit of $25,000.00 due

7 November 2011

Cheque for second half of the deposit dishonoured

Seller inspected the Property and observed tenants occupying the Property in breach of the Contract

9 November 2011

Seller terminated the Contract

15 November 2011

Contract was due to be completed

27 July 2012

Seller sold the Property to another buyer for $1,230,000.00

The Seller claimed damages in the Local Court of New South Wales for:

  • the unpaid portion of the deposit ($25,000.00);
  • the legal costs associated with the terminated Contract;
  • the loss of $20,000.00 incurred by the resale; and
  • rent received by the Buyer in breach of the Contract.

The Magistrate in the Local Court gave judgment for the Seller comprising:

  • the unpaid portion of the deposit ($25,000.00);
  • costs of $5,963.71; and
  • damages for subletting totalling $8,250.00.

The Buyer appealed to the Supreme Court with respect to the amounts awarded relating to the unpaid deposit and damages for reletting. The Buyer contended that the requirement to pay the second half of the deposit was unenforceable as a penalty.

In deciding that the Seller was entitled to the second $25,000.00 payment towards the deposit, the Court relevantly noted the following:

  • A deposit is considered an "earnest of the bargain for its performance that is designed to demonstrate the sincerity of the contracting party who is to pay it" (at [58]).
  • A key factor in the penalty issue was the date when the second $25,000.00 payment was required to be made. Here, the Contract required one half of the deposit to be paid on signing the Contract and the second half to be paid 70 days later.Settlement was then not due to occur until over four months after the payment of the second half of the deposit.
  • The timing of the second payment so far in advance of the settlement date allowed the second instalment to be genuinely characterised as a deposit, as it was an earnest for performance of the Contract. This distinguished the case from earlier decisions, where the second instalment of a so-called deposit was held to be a penalty, because it was payable on the settlement date if the purchaser failed to settle.This made that payment not an earnest for performance but a penalty for failing to settle (at [63]).
  • The Court said that if the second payment had been due on the settlement date, the clause entitling the Seller to keep or recover the deposit "would not have saved that second payment from being considered a penalty" (at [64]).

The Supreme Court ultimately dismissed the appeal and affirmed the decision of the Local Court to award the amounts to the Seller.

Key points

  • A contract providing for a deposit payable in instalments must be carefully drafted to ensure that your interests are protected as to your entitlement to the deposit.
  • A deposit is less likely to be a penalty when the date for payment of the instalments is prior to the settlement date.
  • The judgment highlights how difficult it can be to distinguish between a deposit and a penalty, so it is important to ensure that legal advice is obtained prior to entering into a contract of sale.

© HopgoodGanim Lawyers

Award-winning law firm HopgoodGanim offers commercially-focused advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Borcsa Vass
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.