It is normal in residential property transactions on exchange of contracts that a buyer is required to pay a 10% deposit. This is part payment of the purchase price. At exchange of contracts, the seller and the buyer enter into a legally binding agreement. At any time prior to the exchange of contracts, either party may walk away without liability to the other party.
Most of the time a sale will complete without any problems, however on occasions completion may not take place. In such circumstances, can the seller keep the deposit or is the buyer entitled to have it returned? The answer to this will depend on the individual circumstances.
If the seller fails to complete, it is likely that the deposit should be returned to the buyer, unless it is clear that the seller’s failure to complete was due to the fault of the buyer. The buyer may also be entitled to sue for any other losses it has suffered as a result of the seller’s breach.
A seller is required to give vacant possession of the property on completion. The seller should make sure that any tenants residing in the property have vacated prior to exchange of contracts. If the seller fails to give vacant possession of the property on completion, the buyer may be able to terminate the contract, recover any deposit paid and claim damages.
If the buyer fails to complete, for example in light of the current market conditions, where property prices have fallen, the seller may not only retain the 10% deposit, but also claim damages from the buyer should it be able to establish that it has suffered losses over and above the value of the deposit.
The court has discretion to consider ordering the return of the deposit, if it thinks it is appropriate in all the circumstance to do so. A buyer would need to show that it would be unjust for the seller to retain the deposit. The lack of funds by a buyer to complete is unlikely to be considered as an exceptional circumstance for the court to exercise its discretion. The buyer should ensure it has all financial arrangements in place and confirmed. A buyer would not want a funder to pull out and find it is unable to complete the purchase. Should this happen, the seller is likely to rescind the contract and keep the entire deposit paid, regardless as to whether the seller has suffered any loss.
It is therefore essential, whether you are a buyer or seller, to ensure you can practically complete the transaction before exchanging contracts as the consequences can be very expensive, particularly if there are related sales and purchases. In addition to the above, the defaulting party is likely to be liable for the legal costs incurred by the other party.
