Is Your Deposit a “Clayton’s” Deposit?

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Is Your Deposit a “Clayton’s” Deposit?

Deposits payable under Contracts for the purchase of property are often payable in separate instalments.  Although we find this happens often, a recent case in the Supreme Court of New South Wales should remind Sellers that, depending on the drafting of the Contract, the Seller may never have the ability to claim the second instalment of a Deposit.

The case considered in the Supreme Court of New South Wales involved a very expensive property and, despite numerous extensions to the Settlement Date, the Buyer was unable to complete the Contract and the Seller eventually terminated.  The second instalment of the Deposit was payable on the earlier of the actual Completion Date stated under the Contract or when the Contract was actually completed, or on default of the Buyer.

When the Seller terminated the Contract for non-performance of the Buyer of its obligations under the Contract, i.e. failure to complete the Contract, the Seller went on to sell the property to another buyer for a tidy profit of approximately $1million.

The Seller also attempted to recover the balance 5% Deposit, equalling $850,000.00, from the Buyer.  The Court found that the balance deposit wasn’t payable to the Seller as this would in fact be a penalty and not a deposit or,  “earnest of performance”.  Much discussion of previous cases was carried out by the Judge in this case but essentially, the principle that may be extracted from this case is that if a second instalment of a Deposit is payable on the Completion Date and the Buyer is in default, then the payment of this second instalment of deposit is exacted because of breach of Contract and in these circumstances, is a penalty and is void.

This does not mean that a Deposit may not be paid in instalments. For example, the second instalment may be due on satisfaction of finance or due diligence, and this will be valid.  However, if a Contract specifically states that if the Buyer is in default the second instalment of the Deposit is payable, or if it is payable under circumstances where the Buyer is actually in default, then it is likely the Court will hold such payment to be a penalty and not a genuine “earnest of performance” or a valid pre-estimate of damages incurred.

Accordingly, a Seller must be very careful as to how a condition for part payment of Deposit is worded in the Contract to ensure that the Seller is, in fact, entitled to the full Deposit as an earnest performance under the Contract.

Should you require assistance in this regard, or in any other aspects of property sales or purchases, please contact MMLaw.

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The content published in this Blog is in the form of academic papers and the opinions expressed herein are generalised. The information provided is for educational purposes, not specific legal advice.

The application of any principles referred to can alter from case to case and accordingly you should seek independent legal advice in respect of your individual circumstances.


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