Real Estate things you once knew but may have forgotten - Notices to Complete and Forfeiture of deposits in property transactions

This month we look at Notices to Complete and Forfeiture of deposits in property transactions.

The Deposit

A deposit is an "earnest for the performance of a contract" and, as such, is an exception to the rule under English law that a security which is not a genuine pre-estimate of potential loss is unenforceable as a penalty. If the purchaser completes, the deposit is treated as payment on account of the purchase price, but if he does not then the seller can forfeit and keep the deposit.

Notices to Complete

Time is not automatically of the essence for completion so the sale contract will provide that on or after the date fixed for completion a party who is "ready, able and willing to complete" may give to the other a notice to complete. This makes time of the essence. If completion does not take place on the date specified, the aggrieved party is entitled to treat the contract as at an end.

• If the buyer fails to complete, the seller may rescind the contract, keep the deposit together with accrued interest, re-sell the property and claim damages.
• If the seller fails to complete, the buyer may rescind the contract, seek repayment of his deposit together with accrued interest and claim damages.

NB: Service of a notice to complete by a party who is not "ready, able and willing" to do so is of no effect. It is also a repudiatory breach by the party serving the notice, so that the recipient can treat the contract as at an end if the completion date passes and the party serving notice to complete fails to do so.

So what damages can be claimed?

Damages will be all reasonably foreseeable losses naturally flowing from the failure to complete so as to put the "innocent" party in the position he would have been in had the purchase completed. The starting point is, therefore, the difference between the contract and market prices of the property i.e., the aggrieved party's loss of profit, together with other costs such as wasted legal fees and interest payable on a mortgage or bridging loan. The seller has to give credit for the deposit received. There can be no "profit" element in calculating damages despite the best wishes of many people buoyed by the extravagant damages awarded in the United States, punitive damages are not available.

Section 49(2) of the Law of Property Act 1925 (Vendor/Purchaser Summons)

Section 49(2) of the Law of Property Act 1925 provides that "in any action for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit".

The Court has extensive discretion to mitigate the seller's right to keep a forfeited deposit where it would be "unconscionable" to do so. The starting point is acceptance that the buyer provided a deposit as a bond for performance and did so in full knowledge that it would be forfeit if he did not fulfil his contractual obligations. The Court's discretion is, therefore, to be used sparingly, "where the justice of the case requires". It should not be used simply because the sale did not complete.

Fault is not the only factor that the Court considers. The Court may exercise its discretion where the seller goes on to make a significant profit in the resale of the property. In such circumstances, the Court has ordered the return of the deposit to the buyer.

Remember.....

• You must be "ready, able and willing" to complete on the date specified in your notice to complete. If not, the other party may treat this as a repudiatory breach, entitling him to walk away from the transaction. Do not serve notice in the hope that you may be ready - the risk may be too high. This should serve as a strong warning to anyone who seeks to serve notices to complete prematurely, for instance developers who gamble on the speed of their construction programme and serve notices based on a timetable that subsequently slips behind schedule.
• Generally speaking, the innocent party gets to keep the deposit - but not always. Remember the Court's broad discretion under section 49 of the Law of Property Act 1925 to order the return of the deposit - even to a defaulting buyer - if the justice of the case requires it. The bottom line is that no windfalls are guaranteed in a buoyant property market!

If you have any queries or require further information, please contact Caroline DeLaney on 020 7367 2329 or at [email protected].