Retaining deposit when the buyer fails to complete (Solid Rock Investments v Reddy)

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When must a property seller return the contractual deposit when the buyer fails to complete? Kate McCall, partner at Shoosmiths, says a recent ruling clarifies how the courts will approach a buyer’s application for the return of a deposit where it failed to complete—and only in exceptional circumstances will the deposit be returned.

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What are the implications of this case for lawyers?

The case does not create new law, but serves as a useful reminder of how the courts will approach an application by a buyer for the return of a deposit, in circumstances where the buyer has failed to complete a property acquisition.

The case reiterates that a subsequent price rise and/or the fact that the seller will receive a financial windfall, will not of itself, justify the return of the buyer’s deposit. Similarly, the fact that the buyer has taken steps to rectify its breach by attempting to complete and pay any associated costs/interest, will not necessarily sway the court. Fundamentally, deposits serve as a guarantee for performance of the obligation to complete and only in truly exceptional circumstances will they be returned to a buyer who has failed to honour his side of the bargain.

What was this case about? Why is it significant?

The case concerned the acquisition of a property for £430,000. A 10% deposit had been paid by the buyer. Due to difficulties in obtaining funds from abroad, the buyer failed to complete the acquisition on the completion date. On the expiry of a notice to complete, the seller rescinded the contract, and retained the deposit, as it was entitled to do under the contract. A day later, the buyer informed the seller that it was ready to complete and offered to pay interest and costs, as well as the purchase price. The seller maintained that the contract had been rescinded, and later sold the property to a third party at a higher price, as the likelihood of obtaining planning permission had improved.

The buyer made an application to the court under section 49(2) of the Law of Property Act 1925 for return of the deposit, which was rejected. The buyer appealed on the basis that the judge had failed to take into account the economic benefit to the seller of rescinding and the offer from the buyer to pay costs and interest in order for the original deal to proceed.

Perhaps the most interesting thing about this case is that the buyer actually raised the necessary funds and offered to complete the purchase (and pay any interest and consequential costs incurred by the seller) within a day of learning of the seller’s decision to rescind. What is more, at that point, the seller had not suffered any material loss as a result of the failure to complete. Nevertheless, the court refused to exercise its discretion in favour of the buyer.

How helpful is the judgment in clarifying the law in this area? Are there any remaining grey areas?

The case law in this area was not particularly unclear. The recent line of authorities had made it clear that the court will typically only order the return of the deposit where special or exceptional circumstances exist that justify overriding the ordinary contractual position that the seller retains the deposit if the buyer fails to complete. Such cases include:

What the decision is useful for is illustrating, by reference to past case law, what the ‘exceptional’ or ‘special’ circumstances referred to above might be.

The fact that the seller had not suffered any loss as a result of the buyer’s failure to complete will not, of itself, amount to a ground for ordering the return of the deposit. However, the economic impact on the seller is a factor that the court can take into account. Other relevant considerations include:

  • how close the purchaser came to completing
  • the alternatives that were proposed to the seller and how advantageous they would be compared with the original contract terms
  • whether the seller caused or contributed to the failure to complete and/or otherwise acted in a high-handed way
  • a lack of funding owing to matters outside of the buyer’s immediate control will not normally warrant the return of the deposit

How does this case fit in with other developments in this area of law? Do you have any predictions for future developments?

Some might say that the decision is harsh, but I don’t think that it is entirely surprising—the buyer had plenty of chances to get its house in order and failed to do so (the seller had already made two offers to extend the date for completion, and served a valid notice to complete which had expired). Nevertheless, the decision still feels slightly harsh—particularly when you consider the double whammy windfall (in the form of the retained deposit and the uplift in purchase price) which the seller obtained as a result.

The case is, at first glance, also at odds with the decision in the Cook v Irvine case (the most recent of the authorities) referred to above. In that case, the court ordered the return of the deposit in circumstances where it was clear that the seller knew that the buyer would be able to complete in a matter of days but had rescinded the contract anyway to obtain the benefit of rises in the market. However, the reality is that the seller in that case had acted particularly unconscionably and there were other factors at play that seemingly swayed the trial judge (the buyer in that case had undertaken enhancement works to the property in anticipation of completing the purchase).

Ultimately, as unsatisfactory as this decision may have been from the buyer’s perspective, it at least gives practitioners relative certainty when advising on this area of the law. Had the decision gone the other way, it would have put sellers wishing to rescind and resell to a third party in a difficult and potentially risky position—potentially stifling onward sales. For now at least, the position is clear—failure to complete will result in the buyer’s deposit being forfeited in all, but the most exceptional and compelling cases.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

 

 

 

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