Reduced Deposit Clauses in Conveyancing Contracts
As a result of a recent judgement of the New South Wales Court of Appeal (Court) in Luong Dinh Luu v Sovereign Developments Pty Ltd & 2 Ors [2006] NSWCA 40, the Court found that the reduced deposit clause in the relevant land sale contract the subject of the dispute between the parties (Contract) amounted to a penalty and was therefore unenforceable.
The figures shown on the front page of the Contract clearly stated that the deposit payable was less than 10%. Elsewhere the Contract contained an additional provision which in effect stated that where the purchaser pays a deposit which is less than 10% of the purchase price and the purchaser defaults, the whole 10% deposit is payable and the vendor is entitled to sue and recover the difference between the deposit paid and the amount representing 10% of the purchase price (Clause).
In reaching its decision the Court found that the Clause did not specifically state that the deposit was 10% of the purchase price. Its language merely assumed that it would be 10% which was contrary to the figures appearing on the front page of the Contract which clearly showed the deposit payable was less than 10%. The stated figures prevail in overcoming the ambiguity created by the Clause, the Clause amounted to a penalty and was therefore unenforceable.
In light of the decision it is advisable not to show a less than 10% deposit on the front page of the land sale contract and to ensure that there is an additional provision in the contract indicating that a 10% deposit is payable via instalments (ie an amount on exchange of contracts and the balance at some other specified time during the course of the transaction.) Such a provision is not in the nature of a penalty and retains the true nature of a deposit which is that of “an ‘earnest’ of the bargain or its performance that is designed to demonstrate the sincerity of the contracting party who is to pay it” as per McPherson J A in the case of Ashdown v Kirk [1999] 2 Qd R 1.
In Iannello & Anor v Sharpe [2007] NSWCA 61 the Court of Appeal again considered whether an additional provision in the contract for sale of land in similar terms to the wording of the Clause was enforceable.
Hodgson, J A in his judgment said ‘….in my opinion the nature of the obligation to make the payment is more important in determining its character than the name chosen by the parties.’ In other words where the parties to an agreement agree that where a party as a result of that party’s default in the observance or performance of an obligation under the agreement which has become an essential term is required to pay an additional sum of money to the party not in default, that payment by virtue of its nature constitutes a penalty and is therefore unenforceable. It does not matter whether it is described as the ‘balance of the deposit’ if its true characteristic is that of a penalty.
For further information please contact David Buda on (02) 9018 6407 or dbuda@rbhm.com.au
|
Back