Over Taylor Biggs

The deposit is regarded by the Courts as something more than simply a deposit and is more "an earnest for performance of the Contract".   A Buyer's inability to complete is the risk that a deposit is intended to guard against.

In the case before the Court of Appeal, the Buyer applied for the return of its deposit.  The property had been sold for £4 million and the Buyer had paid a 10% deposit when Contracts were exchanged.   The Buyer failed to complete and the Seller rescinded the Contract once its Notice to Complete had expired.

Under Section 49(2) Law of Property Act 1925 the Court is given power to order repayment of a deposit where the Court refuses to grant specific performance of a Contract or in any Court action applying for the return of a deposit.

In this case the Seller subsequently sold the property for £4.3million and nonetheless forfeited the deposit paid by the original Buyer.   As the Seller had made a profit on the resale the Seller argued that the non-return of the deposit would amount to a penalty. 

The Court of Appeal supported the Seller and concluded that the contractual provision for payment of the deposit on the sale of land is an exception to general principles governing non recoverability of penalty under a normal contract.   This exception allows a deposit validly to be forfeited even if the deposit sum bears no resemblance to the anticipated loss to the Seller arising from the Buyer's breach.

The fact that the Seller may make a profit is irrelevant where a deposit is forfeited.   The Court is only more likely to exercise its discretion to return the deposit if any failure is partially attributable to the Seller's default.

In this case there was nothing to suggest that subsequent higher price achieved by the Seller was exceptional in relation of general movement of values in the property market.   There was no reason why the Buyer should obtain the benefit of the increased sale price that the Seller had achieved, when the Seller had borne the risk and the cost of holding the property in the meantime.

This case clarified the operation of Section 49(2) and highlights the importance of making it clear that there is a presumption that the Seller will have the right to retain any deposit if the Buyer defaults and confirms that the burden of establishing that this should be overridden falls firmly on the Buyer.

Midill (97PL) Limited -v- Park Lane Estates [2008] Court of Appeal.