In the ordinary course of events, a buyer who pays a deposit upon the exchange of contracts will lose that deposit if it fails to proceed to complete.
It is however possible for a Court Order to be obtained requiring the seller to return the deposit to the buyer even where the buyer has failed to observe its contractual obligations (and has failed to complete).
The discretion of the Court has in the past, been exercised where a deposit was considered to be excessively high (see the case of Workers Trust v Dojap Investments Limited). There is also statutory provision (Section 49 of the Law of Property Act 1925) which provides that the Court may order the refund of a deposit where it considers it appropriate.
The recent case of Amble Assets v Long Benton Foods concerned an application for repayment of a deposit (which in this instance concerned a company sale and amounted to 10% of the value of the property and 50% of the value of the processing equipment used in the business). The court didn’t actually rule on the reasonableness of the deposit but appeared to take the view that it was reasonable given the commercial risk involved in the transaction. This appears to reflect the fact that Courts take the view that the question of a deposit’s reasonableness won’t depend upon whether it reflects potential loss but rather whether it is reasonable in the circumstances of the transaction as a whole.
Whilst the Amble Assets case suggests the usual rule of thumb (that a 10% deposit is reasonable) may be displaced comparatively easily, it nonetheless emphasises the risks which a party takes in entering into a transaction on the basis of receipt of a deposit in excess of 10% of the purchase price. In so doing there is a very real prospect that a court may order the return of the deposit even where the party who has paid the deposit defaults in respect of its other contractual obligations.
If you wish to discuss any of the issues raised in this blog, please contact James Snaith at james.snaith@parissmith.co.uk.
Tags: Amble Assets v Long Benton Foods, deposits, forfeiture, Workers Trust v Dojap Investments Limited