Opinion: Deposits and penalty clauses

12 Apr 2017

This article was first published in the Estates Gazette.

So what is too high, and what are special circumstances? There is no decision yet in England or Wales where the courts have answered that particular question, but there are decisions from other jurisdictions which are relevant.

In a Jamaican case, Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] 2 WLR 701, a bank which had sold a property at auction taking a deposit of 25% – more than the customary 10% -17.5% – was ordered by the Privy Council to repay the whole amount (not just the part of the deposit in excess of 10%) to the defaulting purchaser.

And in the Hong Kong case of Polyset Ltd v Panhandat Ltd [2002] 5 HKCFAR 234, a defaulting purchaser was able to recover the whole of his 35% deposit on a purchase of commercial property when he failed to complete for much the same reasons.

What these cases tell us are two things. Firstly, that it is going to be difficult for developers to hang on to deposits of greater than 10% if they are challenged by defaulting purchasers. Secondly, that, if the deposits have to be repaid, all of the sum must be repaid, not just the proportion that is ‘excessive’.

What we don’t yet know, however, is what ‘special circumstances’ are that could persuade a court to allow the seller to keep the deposit.

One argument on behalf of a developer might be that its business model requires high deposits from purchasers of off-plan properties – who are willing to pay this sum and take the risk because they are gambling on increase in value in the property market and maybe a quick sale at a profit – and that this justifies taking a higher deposit than normal.

A test case is awaited.


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