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Property: Sale Deposits Hazards

The recent case of Barnard v Zarbafi [2010] EWHC 3256 (Ch) sheds further light on one aspect of sale deposit claims.

The general rule is that a contractual provision for a penalty is unenforceable. An established exception lies in contracts for the sale of land, where the deposit is the consideration ("earnest") for the performance. The exception normally applies only to a deposit of up to 10%. In Workers Trust & Merchant Bank Ltd v Dojap Investments [1993] A.C. 573, the conventional deposit in Jamaica was 10%, recognised as an enforceable exception to the penalty rule; but there was also an established practice of 25% deposits in certain auction sales. The buyer failed to complete. The Jamaican Court of Appeal held the 25% deposit was an unenforceable penalty and ordered the repayment of the excess above 10%. The Privy Council confirmed the unenforceability, but held that the whole deposit was repayable. It ruled that a vendor seeking to obtain a greater sum than 10% as a forfeitable deposit had to establish special circumstances justifying it.

Special circumstances were shown in Barnard v Zarbafi (above), where an initial deposit of 5% was increased by a supplemental agreement in stages to 15% when the buyer was unable to meet the completion date. The Court held that the vendor had shown special circumstances that made the 15% deposit reasonable, including the staged increases, and the length of the time extension provided in difficult market conditions.

The cases show (1) that any initial deposit above 10% is almost certain to be unenforceable and therefore repayable in full, and (2) that any increase by subsequent agreement to over 10% will need careful consideration as to whether it can be justified by special circumstances to be a reasonable deposit. In the case of any deposit, the court has a discretion to order whole or partial repayment under s.49(2) of the Law of Property Act 1925 where there is something special or exceptional to justify overriding the ordinary contractual expectations of the parties: Midill (97PL) Ltd v Park Lane Estates Ltd (2009) 1 WLR 2460.

Mark West / 2nd May 2011


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