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Legal ‘discretion’ may help defaulting buyers reclaim deposit

27 June 2008

In a difficult market it is inevitable that more land sales will fall through, some even after contracts have been exchanged and deposits paid.

It is a standard requirement in land transactions that a buyer pays a deposit on exchange of contracts. He gets the deposit back if the seller fails to complete, but forfeits it if he is the one to drop out.

That is, at least, the expectation in standard practice but in fact the court has discretion to order the deposit to be returned if it thinks fit. This little-know discretion (contained in the Law of Property Act 1925) is an attractive idea for defaulting buyers, particularly if the deposit is substantial. But as recent case law shows, there must be very persuasive reasons as to why the deposit should not be forfeited.

The starting point for the court is that repayment should only be ordered if it is the fairest course in all the circumstances. The consequences of paying a deposit should be certain, and buyers should expect to forfeit if they fail to complete. They should not be able to reclaim the deposit merely because the sale does not go through.

The court will look at how close the buyer came to performing the contract, what other choices he is able to offer the seller and how they would compare with the actual performance of the original contract terms. If the seller can re-sell at a higher price, the return of the deposit might be justified, but in itself this is not a sufficient ground. Equally, the conduct of the respective parties may be considered. This does not necessarily prevent the seller, however, from playing hard ball and refusing to negotiate with the buyer outside the terms of the original contract.

Buyers should make sure they definitely want (and can) go ahead with the transaction before exchanging contracts and paying the deposit.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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Alasdair Garbutt LLB (Hons)
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Alasdair Garbutt
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