The leading case in this area is Sydney Developments Pty Ltd v Perry Properties Pty Ltd (2016) NSW ConvR 56-364 and the key points are:

1. 10% of the purchase price may be forfeited even if a contract stipulates a larger deposit; and

   
   

2. Where a deposit may be greater than 10%, the main legal issue will be whether the additional portion is a penalty.

Background

Sydney Developments Pty Ltd (Purchaser) entered into a contract with Perry Properties Pty Ltd (Vendor) for the purchase of certain properties in Ashfield. The contract:

1. Stated a purchase price of $4,658,888.00;

   
   

2. Was exchanged on 2 September 2015; and

   
   

3. Was scheduled for settlement in 274 days being 1 June 2016.

$465,888.80 being 10% of the purchase price was paid as a deposit on exchange. However, Special Condition 25 (SC 25) of the contract provided that:

Notwithstanding anything else in this contract it is agreed that the purchaser shall:

1. pay to the Vendor a deposit of 10% of the purchase price by bank cheque on the date of this contract; and

   
   

2. pay to the Vendor an additional deposit of 10% of the purchase price by bank cheque (whereby the deposit paid shall then be 20% of the purchase price) such payment to be by no later than 122 days from the date of this contract time being of the essence.

In the event that the purchaser does not comply with the terms of this special condition (which are essential terms of this contract) the vendor may terminate this Contract by notice in writing and the purchaser shall forfeit the deposit paid on the date of this contract.

By 2 January 2016, the Purchaser had failed to pay the additional 10% of the purchase price and on 6 January, the Vendor terminated the contract on that basis. The Purchaser contended that because SC 25 was a penalty, it was unenforceable and that the Vendor had repudiated the contract by terminating when they were not entitled to terminate. The Purchaser commenced proceedings seeking, amongst other relief, for the 10% paid as a deposit. The Vendor sought to keep the 10% deposit.

Decision

Darke J held that the Vendor was allowed the 10% deposit. The decision was that SC 25 should not be considered a penalty because only 10% of the purchase price was forfeited. He contrasted the facts of this case with the decision in Workers Trust and Merchant Bank Limited v Dojap Investments Limited [1993] AC 573 where a 25% deposit being entirely forfeitable needed to be justified by special circumstances. The forfeiture in this case only applied to the 10% payment which was reasonable and no penalty could be involved. Instead, SC 25 was merely an essential term and in default of that term by the Purchaser, the Vendor was entitled and had validly terminated the contract. 

Significance

The decision affirms existing principles of forfeiture, being the distinction between penalties and valid deposits. Significantly, it provides a method for prudent Vendors to draft additional security into contracts for sale. As long as only a reasonable amount is forfeitable, such as 10% of the purchase price, Vendors may seek to embed essential terms that call for additional sums to be paid before settlement. However, the unique circumstances of this case should be acknowledged, including the considerably lengthy period of time between exchange and settlement, that both parties were companies with solicitors that negotiated the contract and the substantial purchase price. 

As it stands, the law around deposits is not easily deciphered and legal assistance will be invaluable. If you have any issues with deposits or conveyancing, feel free to contact Longton Legal. Our team of Property Law experts can help you to protect your interests and navigate your rights and obligations.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*