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Deposits

This case deals with s49(2) of the Law of Property Act 1925, which provides the court with power to order the return of forfeited deposits. The court will only exercise its discretion under s49(2) of the 1925 Act to return a deposit in exceptional circumstances.


Section 49(2) of the 1925 Act

Section 49(2) of the Law of Property Act 1925 reads as follows:
    "Where the court refuses to grant specific performance of a contract, or in any action for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit."

No power to contract out

Aribisala v St James Homes (Grosvenor Dock) Limited
[2007] EWHC 1694 (Ch).
Alan Steinfeld QC, sitting as a High Court Judge

There was a clause in the contract seeking to exclude the provisions of s49(2). However, the court held that it is not possible to do so. The judge at paragraph 33:
    "The section is not in terms conferring a right upon either party to the contract. What it is doing is conferring jurisdiction on the court exercisable at its discretion to order the repayment of any deposit, obviously necessarily paid by the purchaser. On its face, it seems to me, that a provision in a contract which purports to exclude the section .. is a provision which is purporting to oust the jurisdiction of the court under that section and which is accordingly on well established authority void and of no effect on the ground of public policy."

Exercise of court’s discretion under s49(2)

To return deposit to buyer who failed to complete

Midill (97PL) Limited v Park Lane Estates Limited
[2008] EWCA Civ 1227

Summary

The court will only exercise its discretion under s49(2) of the 1925 Act to return a deposit in exceptional circumstances. A mere price rise in the property is not likely to be sufficient.

Facts

The parties agreed the sale of shares in a company that owned a property on Park Lane, London at a price of £4M, payable in 3 instalments. The buyer paid the first 2 instalments but not the final instalment (which was due on completion). The seller served a notice to complete and rescinded the contract when the notice expired without the buyer having completed the purchase. The claim was by the buyer for the return of its deposit. His Honour Judge Mackie QC dismissed the buyer’s claim, and his decision was upheld by the Court of Appeal. There were two issues.

First Issue – "ready, able and willing to complete"

The buyer argued that the seller had not been "ready, able and willing" to complete when the seller served the notice to complete nor when the notice expired, and that the notice and the rescission of the contract were therefore invalid. This argument was based on the fact that the sale contract required the seller to hand over certain documents on completion, including the resignation of officers of the company (which had to come from Jersey), and these were not available when the notice expired.

The question of whether or not a party was ready, able and willing to complete was a question of fact, and it was for the buyer to prove that the seller was not ready, able and willing to complete, which he had failed to do. The trial judge held that the seller would have been able to obtain the necessary resignations, even if faxed copies had to be obtained from Jersey.

Second Issue – s49 of the 1925 Act

The buyer also sought the return of his deposit under the court’s discretion in s49(2) of the Law of Property Act 1925, arguing that because the seller had in fact sold the property to a third party at a profit, it was just for the deposit to be returned.

The High Court dismissed the claim, on the grounds that repayment of a deposit will not normally be ordered unless there are special factors in the case, and there were no such factors in this case. In particular, the fact that the seller had made a profit on a sale to a third party was not a special factor. The Court of Appeal upheld that decision.

Carnwath LJ described the learning in respect of s49(2) LPA 1925 as “surprisingly incoherent”. However, he approved the following passages of Arden LJ in Omar v El Wakil [2001] EWCA Civ 1090:
    "The starting point must be that although section 49(2) is expressed in open-textured terms leaving it to the courts to determine the organising principles, the court must bear in mind that the payment in question was a 'deposit', that is an earnest for performance and that accordingly there should not be relief simply because the … contract never took place….
    The context here is of a conveyancing transaction. It is common knowledge that if a purchaser pays a deposit he is likely to forfeit it if he does not fulfil the contract. Moreover deposits are very usual features of conveyancing transactions and conveyancing transactions are common. It is important that there should be certainty attaching to the consequences of paying a deposit.
    … I would start from the position that the deposit should not normally be ordered to be repaid. Are there any mitigating circumstances in the present case?..."
    .. in a situation where a purchaser could not himself perform, the circumstances which make it appropriate for the court to exercise its discretion under section 49(2) in his favour must be exceptional. Inability to complete is exactly the risk the deposit was intended to guard against…"
On the facts of the present case Carnwath LJ concluded as follows:
    “In my view, the judge's reasoning was impeccable. He was entitled to find that it was not enough that the vendor sold at a higher price some months after the date for completion….There is nothing to suggest that the price rise was exceptional, in relation to movements in the market generally. There is no obvious reason why the purchaser should have the benefit of any such price rise. It was the vendor who had borne the risk and cost of holding the property during the intervening period. I also agree with the judge that to decide otherwise would add undesirable uncertainty to the well-established contractual understanding.”
The claim for return of the deposit was dismissed.

Comment

This decision illustrates how difficult it is for a defaulting buyer to persuade a court that he should be entitled to recover his deposit, even where (as in this case) the seller has actually made a profit out of the default.

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