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Return of Deposit
"A buyer who fails to complete the purchase of a property may still be able to recover the deposit paid on an exchange of contracts."

THE CASE The High Court has had to consider for the first time whether a contract term is enforceable if it excludes the right of a purchaser to seek to recover its deposit after failing to complete on time (Aribisala v St James Homes (Grosvenor Dock), 12.06.07).

In July 2006, Chief Aribisala contracted to buy two leasehold properties from the defendant for a total price of £2.16m. He paid a 10% deposit of £216,000 but was unable to complete by the due date because of problems obtaining the necessary funding from his bank.

The vendor terminated the contracts and sought to forfeit the deposits, arguing that the purchaser could not pursue any claim to recover the deposits as the contracts excluded his right to do so.

In accordance with section 49(2) of the Law of Property Act 1925, a court may, if it thinks fit, order the repayment of a deposit to a purchaser if it either decides not to make an order requiring the purchaser to complete the acquisition or, if the purchaser applies for the return of the deposit.

Despite the fact that section 49(2) came into effect more than 80 years ago, it was not really appreciated until relatively recently that the court has unfettered discretion to relieve a purchaser from the consequences of its own default where justice dictates it would be unfair for the vendor to keep the deposit.

The most likely situation where the court may allow the return of a deposit is where the vendor resells the property at a profit and suffers no loss as a result of the purchaser’s default. In such a case, the court may well allow the purchaser to recover its deposit provided it meets the vendor’s costs of having to resell the property.

In order, presumably, to allow the vendor to be able to both forfeit the deposits and resell the properties at a profit in the event of default by the purchaser, the vendor’s solicitors expressly provided in the contracts that section 49(2) would not apply. The purchaser argued that such a provision is ineffective as it was not possible to oust the court’s jurisdiction to grant relief under section 49(2).

The vendor pointed out that, unlike other provisions of the 1925 act, there was no express provision to prevent parties from contracting out of section 49(2) and it argued that it was not against public policy for a purchaser to give up a right conferred by statute if it agreed to do so.

However, the court held that parliament had clearly conferred jurisdiction on the court in the public interest to interfere with the terms of a contract between parties and to order repayment of a deposit if it thought fit. It held that it would be against public policy for parties to agree to usurp the jurisdiction of the court and, accordingly, the exclusion terms in the contracts were invalid.

The purchaser won on the preliminary issue, and a further hearing now has to take place to determine whether there are sufficient special circumstances to warrant the return of the deposit or not.

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