Legal Articles

Non-refundable deposits in an offer to purchase properties are fairly common.

An offer to purchase may also contain breach clauses that allow the seller to cancel that agreement and retain all amounts paid on account of the purchase price as liquidated damages.

This is due to the contract being breached by the purchaser who, after being notified of the breach, then fails to rectify it within a certain number of days.

In terms of the Conventional Penalties Act, 15 of 1962, any penalty or liquidated damages contained in a contractual obligation shall be subject to the provisions of the Act.

It specifically states in section 3 that:

“If upon the hearing of a claim for a penalty, it appears to a court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extent as it may consider equitable under the circumstances: Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor’s proprietary interest, but any other rightful interest that may be effected by the Act or omission in question.”

There is a forfeiture condition also covered by the Act quoted above that comes into effect in the event of a withdrawal from an agreement.

And so the Act applies to both the non-refundable deposits as well as the retention of certain amounts already paid by a purchaser as liquidated damages.

In the Act, it refers to, “any other rightful interest that may be effected by the act or omission in question” which makes allowances for the allocation of a portion of the penalty to compensate for the Seller’s pain and suffering as a result of the stress and anxiety caused by the cancellation.

As the Court doesn’t necessarily work out what the actual damages will be, but rather reduces the penalty, “to such extent as it may consider equitable under the circumstances”, the penalty could thus be far higher than the actual loss suffered.

However, estate agents should take care so as to avoid creating the expectation that the seller will be entitled to all of the non-refundable deposit that has already been paid to the conveyancers in the case of the purchaser breaching the offer to purchase of immovable property which then results in its cancellation.

Conveyancers need to avoid becoming the judge and jury with regards to the funds in their trust accounts.

When a dispute arises about who should be the rightful recipient of these funds, it needs to be either settled through an agreement being reached by both parties or by way of a court order from a competent court.

Generally the contract will provide when the Agent’s commission is payable and the same is a liquidated amount.

The agent will be entitled to this commission even if the estate agent again resells the property from the same seller to another buyer subsequent to the cancellation taking place.

The seller’s damages will often only be liquidated once the property is resold.

Thus the seller will only have a claim in the event that the property is resold or valued for an amount that isn’t enough to nullify the damages caused.

The purchaser runs the risk of the Conveyancer holding the funds until the property is resold. This is because, when calculating the seller’s damages, the net selling price or market value of the property are taken into consideration.

However, the seller cannot deliberately resell the property at a lower price as they are obligated by law to lessen the cost of their damages.

It is recommended that the seller creates an option for the buyer to give a non-refundable deposit when securing the purchase of the immovable property as this is the best way to implement such a provision.

However, problems arise if the buyer chooses not to avail of the option as the amounts that will be forfeited are left in question.