In brief - Vendor unsuccessfully sues for other half of
There have been many decisions and much debate about whether a
vendor can claim the balance of a 10% deposit where a purchaser
defaults. Many recent authorities have held that the vendor is not
entitled to do so and this question was considered afresh in late
October 2016 in the matter of
Kazacos v Shuangling International Development Pty Limited
Contract clause regarding payment of other 5% found to
In this matter the deposit paid was 5% on exchange.
There was a clause in the contract that stated that the other 5%
was payable on the completion date or the date when the purchaser
defaulted under the contract.
The obligations of the purchaser were guaranteed by one of the
The situation was that, after numerous extensions, the vendor
terminated the contract as the purchaser was unable to settle.
The vendor resold the property at a higher price but then sued
for the other half of the deposit.
Justice White held that the clause constituted a penalty and the
vendor was not entitled to claim any other monies from the
Default payment found not to be an earnest of the bargain
The nature of a deposit is that it is essentially an
"earnest" of the bargain made between the parties and the
purchaser's performance of the bargain.
His Honour held that, in this case, the payment to be made on
default had nothing to do with binding the purchaser to its bargain
and was not in any way a genuine pre-estimate of damages for
The Court held that the time when the second tranche of the
so-called deposit was to be paid was when the purchaser had already
demonstrated that it was unable to complete.
The Court seemed to be very much influenced by the fact that the
vendor made a significant profit from the purchaser's default.
Not only did it get to keep $850,000 being the initial 5% deposit
as well as extension fees, it has resold the property for
$1,000,000 more than the original purchase price.
Vendors should consider risk of accepting less than 10% deposit
The Courts consistently held that where a deposit is accepted on
exchange, then this is the amount that the parties have agreed is
the "earnest" for performance of the purchaser's
If the clause stipulated that the deposit was payable, in this
instance, as to 5% on exchange and 5% by a given date which was say
the day when settlement should have taken place, and it was stated
that this payment had to be made on that date even if the delay in
settlement was not caused by the purchaser, this may assist, but it
Therefore, it has to be understood that if you are a vendor and
you accept less than the normal 10% deposit on exchange, if the
purchaser defaults it is most likely that the accepted deposit
amount is the only amount that you are going to be able to recover,
as any attempt to recover anything more will be deemed by the
Courts to be a penalty.
If an owner wants to remove a caveat, issuing a lapsing notice is a quick and easy way to shift the problem to the caveator.
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”
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).