Commercial Property Focus - February 2009
Return of a deposit under S49(2) of the Law of Property Act
1925
The ability for a buyer to ‘get out of’ a
contract for the purchase of land normally comes at the price
of the buyer losing their deposit. A seller’s right to keep the
deposit is made less certain by S49 of the Law of Property Act
1925, giving the Court power to order at its own discretion the
repayment of a deposit to a buyer.
A deposit paid shows a buyer’s commitment to
proceed getting their deposit back when it is the buyer who has
defaulted goes against a common belief that certainty should attach
to the consequence of paying a deposit. Prior to the Law of
Property Act 1925 the common law rule was that a seller was
automatically entitled to retain any money received from a buyer by
way of a deposit. S49 was intended to offer potential relief from
the harshness of such application.
It is likely in the current economic downturn
that there will more instances where contractual relationships
collapse as buyers are unable to secure funding to complete on
contracts they have entered into. The emergence of recent case law
on the interpretation of s49 suggests that buyers are looking to
this statutory provision to salvage what they can in a deal gone
wrong. But how effective is it?
S49 has had a chequered history. Earlier ‘non
binding’ decisions in the 1970’s and 80’s appeared to conflict with
one another as the court would adopt a liberal approach in one case
only to then adopt a more restrictive approach in the next.
This uncertain course seemed to continue. In
the case of Tennaro 2003, the court ordered the return of deposits
in two out of three cases where the defaulting buyer had managed to
find a new buyer before the completion date that was prepared to
pay more than the contract price.
In 2008 however, the court in Aribisala v St
James Homes (Grosvenor Dock) Limited adopted a narrower approach.
One argument the buyer put forward in his defence was that because
the seller had been able to sell its property at a higher price
following the buyer’s default this justified the return of the
deposit. The court disagreed. Although a factor to consider,
this alone was not enough to justify the return of the deposit. The
court further stated that in exercising its discretion under S49
the court was required to look at how close the buyer had come to
performing the contract, what alternatives it could propose to the
seller and how advantageous those would be when compared with the
actual performance of the contract. Where a buyer could neither
perform the contract nor offer an alternative it would be
exceptional for the deposit to be returned. The buyer’s claim
failed.
The case also established at first instance
that parties cannot agree by contract that the provisions of S49
should not apply, the court stating that to purport to oust the
jurisdiction of the court in this way would be contrary to public
policy.
In the same year, the Court of Appeal in
Midill 2008 also reviewed in detail the interpretation of S49 and
adopted the same approach taken in Aribisala ruling that the
deposit should not be returned. A number of points emerged from
this case such as the fact that the court has no power to return
part of a deposit, it is all or nothing and that the court are
likely to look unfavourably on sophisticated buyers who should be
aware of the risks of failing to complete a contract.
The two recent decisions appear to have
clarified the position in respect of the interpretation of S49 and
suggest that the court exercising its discretion and ordering the
return of a deposit will be the exception rather than the rule. So,
buyers must be aware that relying on S49 is a risky strategy and
unless they can convince a court that the circumstances of their
default are outside the ordinary run of cases they will have a hard
task persuading a court they deserve their deposit back.
Karen English,
Solicitor
karen.english@weightmans.com