Fed up with small deposits

There has been an increasing trend towards smaller and smaller deposits. It is not unusual for deposits to be as little as $1,000.00. The difficulty with small deposits is that if the buyer does not proceed after making the contract unconditional it is difficult to recover damages from the buyer.

In the NSW Court of Appeal case Luu v Sovereign Developments Pty Ltd 2006 the seller decided to insert a special condition saying that if the buyer failed to settle then the buyer had to pay the balance of the 10% of the purchase price not covered by the deposit.

The purchase price was $6,600,000.00 and the buyer paid $65,000.00 initially as a deposit. The contract stated that the deposit was $65,000.00. The buyer failed to settle after going unconditional.

The seller sued the buyer for $595,000.00. The Court found that this sum was not part of the deposit but an amount payable if the buyer breached the contract. The court said while a deposit is payable by the buyer if the buyer breaches the contract, this special condition was a penalty clause.

A penalty clause is where you have to pay an amount to the seller even though the seller may not have made a loss. For example if the seller resells for a higher price then they haven't made a loss.

A deposit is different as it is always payable even though the seller may have resold for a higher price.

Penalty clauses are illegal and consequently the seller lost the case.

What our firm has done in the past to avoid this problem is make the deposit payable by instalments, for example $1,000.00 on signing the contract and the balance of the 10% on settlement. This makes it easier to recover money from the buyer if they don't settle as you can sue them for the balance of 10% (eg $49,000.00 on a $500,000.00 contract) without having to prove you suffered damages. This means your legal fees will be substantially less.

We recommend using this type of clause as it gives more rights to the seller and puts more pressure on the buyer to proceed if they have only paid a small deposit.

If you want to know any further information please do not hesitate to contact Roland Taylor on 0417 605 185.