Is it a deposit or a penalty?
Current trend of property sales
In the current rising property market, it is becoming more common for property buyers to negotiate on the deposit. The standard is 10% of the purchase price under a Contract for the Sale of Land. Nowadays, buyers are requesting a smaller deposit of 5% of the purchase price. In such circumstances, the seller often requires a special condition to be included in the contract for the deposit to be paid by way of instalments. This essentially obliges the buyer to pay the full 10% of the purchase price on default or on or before settlement.
Problems with deposits by instalments and special conditions to this effect
So is there really an issue with a deposit of less than 10%? Indeed there is! There have been recent cases that have considered this problem and in circumstances of their own, the Courts have considered these clauses to be unfavourable and held that such clauses would not be enforceable and void as a penalty.
Recent decisions
Here are some recent examples which considered clauses by accepting deposits by way of instalments:
In Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504, the Supreme Court of New South Wales held that a provision that split the deposit into two instalments was not enforceable in the event of default and was void as a penalty. For instance, 5% on exchange and 5% upon completion of the contract.
In this case, the deposit was to be paid in two instalments. A clause to this effect was stipulated in the contract. The purchaser paid 5% of the purchase price upon exchange, while the other half of the purported deposit was to be paid on completion. However, the purchaser failed to complete the contract. White J concluded that the vendor was not entitled to claim a further 5% of the purchase price as a purported deposit because the amount purportedly described as a deposit was not a deposit and was void as a penalty.
This position was later confirmed in the recent decision of Blanco v Wan [2021] NSWSC 273 which concerns the payment of the deposit by two instalments. The Court held that because the second instalment was not payable at the time when it could be regarded as an earnest of performance, the second instalment did not fall within the notion of “the deposit” and was considered to be a penalty.
Lessons to be learnt
The key takeaway message here is that sellers should weigh up the risk and think twice before accepting a deposit that is less than 10% of the purchase price upon exchange of the contract.
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Disclaimer: This article is published for general information purposes only and should not be used or relied on as legal advice or specific advice. You should seek independent legal advice in respect to your specific matter or questions as each matter is different depending on your specific situations and circumstances. SGH Lawyers will not be liable for any errors or omissions contained within this article.