It has long been the practice of vendors, when accepting a 5% deposit, to include a clause in the sale contract stating that if the purchaser defaults, the vendor is entitled to make demand for the balance of the deposit, to make it up to 10% and forfeit the full 10% deposit. As a result of a recent NSW Court of Appeal decision, this practice can no longer be relied upon by vendors.
The Court held in the case of Iannello & Anor v. Sharpe  NSWCA 61 that despite the inclusion of a reduced deposit clause in the contract for sale, the vendor was not entitled to receive the full 10% deposit when the purchaser defaulted – i.e. the vendor was only entitled to forfeit the 5% deposit paid on exchange.
The Court held that:
despite the front page of the contract specifying a 10% deposit, the purchaser was actually paying a 5% deposit because on completion the purchaser would have to pay the purchase price minus 5%
the obligation to make the second 5% payment was not an obligation to pay a deposit or part of a deposit, as this concept is inconsistent with the characteristics of deposits. A deposit is security for performance in completing a contract, which a vendor is entitled to forfeit if the purchaser defaults. There would never be a time when the purchaser would be paying the second 5% as security for performance. On the contrary, the only time the reduced deposit clause obliges the purchaser to pay this sum is when the purchaser has demonstrated that he cannot complete the contract
an unconditional promise to pay an amount on default does not constitute a deposit, but rather a promise to pay a penalty. The general law is that parties to a contract are not allowed to impose penalties for default under contracts and the Court considers these clauses to be an imposition of a penalty.
Practical reality for vendors
In practice, many vendors would not enforce the reduced deposit clause and sue - the reason being that the purchaser's default is because the purchaser does not have sufficient funds to complete the contract. But, in some cases, the purchaser is an entity of substance and acceptance of the reduced deposit is part of the commercial bargain.
So, vendors should be aware that if they accept a 5% deposit on exchange, they will not be able to successfully sue for the remainder if the purchaser defaults. However, vendors are not prevented under clause 9.3 of the standard form conditions of the contract of sale from suing the purchaser to recover damages for breach of contract.
Nonetheless, when making a commercial bargain, vendors need to be comfortable that the 5% deposit, if forfeited, will be sufficient compensation for their loss.
By Naomi Bangle
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t (07) 3231 1641
t (02) 9931 4906
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