Do You Lose Your Deposit When The Property Sales Transaction Falls Through?

While the inclusion of payment of a deposit is common practice in South Africa, it is not compulsory. A deposit is paid to show that the buyer is committed to the deal and is financially able to stand up to their end of the agreement - it is a show of goodwill by the buyer. The payment of a deposit will also protect the seller as a buyer will be less likely to breach the contract if they know that they could lose their paid deposit. 

 

On the other hand, a deposit also offers some protection to the prospective buyer as it discourages the seller from cancelling the contract. If a deposit is not paid by the specified date, this automatically results in the buyer being in breach of contract and the seller then has the right to cancel the sale or take legal action.

 

The answer to the question on whether a buyer will lose his or her deposit when a sales transaction falls through, depends on the terms outlined in the purchase agreement and the reasons behind the cancellation. The fate of the deposit hinges on whether the buyer was the responsible party for the collapsed sale - i.e., whether he or she was in breach of the contract.

 

It is every homebuyer's worst nightmare: you discover your dream home, your offer gets accepted, and you pay a deposit, only to have the sale collapse before the property is transferred to your name. The crucial question now is, what happens to your hard-earned deposit?

 

If you, as the buyer, breach the contract and cannot rectify the breach within a specified timeframe, you may risk losing your deposit. In such cases, the seller has the right to use the deposit to cover any damages resulting from the transaction falling through, such as legal costs or agent's commission.

 

 

Under property law, various factors can constitute a breach of contract by the buyer, with the most common being the buyer withdrawing after signing an Offer to Purchase (OTP).

 

While the sale of land in South Africa must adhere to the Alienation of Land Act and be in writing, purchasing a home primarily involves a contractual agreement. The contract should clearly outline all conditions that are significant to the sale, leaving no room for ambiguity. This can encompass aspects like the date of occupation, the inclusion of occupational rent, the functionality of the pool pump, or the retention of a retractable washing line.

 

Once all parties involved in the property transfer sign the OTP or Sales Agreement, it becomes legally binding, and both the buyer and the seller are obliged to fulfil their respective obligations. Consequently, if the buyer withdraws after signing, significant penalties may be imposed, including the loss of the deposit. If there are no suspensive conditions written into the sale agreement and the buyer is in breach of the contract but does not take any steps to rectify the breach within the time stipulated, the seller is entitled to keep the deposit.

 

However, if the sale falls through due to unmet suspensive conditions, the contract becomes void, and the buyer is entitled to the refund of their deposit plus interest, but minus an administration fee, which is usually deducted from the interest earned and not the capital investment.

 

The OTP or Sales Agreement usually includes "suspensive conditions," which are specific requirements that must be met for the contract to be enforceable. 

 

Among the most common suspensive conditions are the buyer's need to secure financing (a home loan) and the prerequisite that the buyer's existing property be sold first, often referred to as a "subject to" sale. Other examples of suspensive conditions may also include the buyer's requirement to conduct a timely home inspection and be satisfied with the results, such as assessing the roof structure.

 

 

Another scenario involves the seller breaching the contract, such as by violating a warranty. In such cases, cancellation may not be the sole recourse for the homebuyer. If the buyer can cancel the agreement due to the seller's breach, they are entitled to a full refund of their deposit.

 

Other factors can cause a sale to fall through, and these circumstances determine the fate of the deposit.

 

 

3.1 Deliberate withdrawal of the home loan application: Regardless of loan approval, withdrawing the application breaches the contract if a home loan is necessary for financing the purchase.

 

3.2 Buyer's remorse: If the buyer withdraws after signing without a legally justifiable reason.

 

3.3 Failure to meet suspensive conditions: While these conditions protect the buyer, failing to try to fulfil them results in deposit forfeiture. For example, if the purchase is contingent upon selling the buyer's existing home, they must demonstrate genuine efforts to market it.

 

 

4.1 Failure to secure funding: If the OTP is subject to securing financing and the home loan application is denied, the deposit will be refunded.

 

4.2 Seller's breach of contract: If the seller breaches the contract, and the buyer cancels as a consequence, the buyer is entitled to a full refund of their deposit.

 

4.3 Title deed and legal issues: If the transaction fails due to outstanding payments owed by the seller or title deed disputes related to the property, the seller is in breach and the buyer will have their deposit returned.

 

Although most home sales are successful, it is crucial to acknowledge the possibility of a sale falling through. Both buyers and sellers should be aware of this risk when entering a property transaction.

 

The deposit, which is typically held by a conveyancing attorney or estate agent, serves as evidence of the buyer's commitment to the home purchase and assurance to the seller regarding the buyer's intention to honour the OTP agreement. If the sale fails and the buyer is not at fault (for instance, due to an unmet condition), the buyer should have complete confidence that the deposit will be promptly returned to them, along with any accrued interest.

 

It is highly recommended that buyers seek legal advice when including suspensive conditions, as they serve to protect the buyer and ensure their readiness for full commitment. Properly incorporating these conditions can safeguard the deposit.

 

 

Property sellers sometimes wants to include a non-refundable deposit clause in the Contract of Sale - as they are under the impression that they will be entitled to all the non-refundable deposit or monies already paid to the conveyancer on account of the purchase price if the purchaser breaches a Deed of Sale and such breach results in the cancellation thereof.

 

The seller will, however, then find out that after cancellation of the contract due to breach, that not all amounts may be retained as liquidated damages or as a non-refundable deposit.

 

In terms of our case law (Matthews v Pretorius 1984) and the Conventional Penalties Act 15 of 1962, any penalty or liquidated damages contained in a sales contract shall be subject to the provisions of the Act which affords the Court the discretion to, on hearing a claim for a penalty or a non-refundable deposit, find that it might be out of proportion to the prejudice suffered by the creditor and the Court may reduce the penalty to what it may consider fair under the circumstances, taking in due consideration the interests of all concerned.

 

Non-refundable deposits are there for a myth and together with forfeiture clauses, subject to scrutiny by the Courts. Unless the parties to the agreement can come to an agreement regarding the penalty, the Court must be sought to quantify the amount payable as a penalty.

 

 

A rouwkoop clause in its pure form comes from our common law. It is derived from the Dutch words meaning "regret and purchase". Such a clause entitles a party to a contract to pay a sum of money to be allowed to withdraw from the contract. It essentially sets a purchase price for freedom from the contract payable by the purchaser. If the purchaser then withdraws from the contract and pays the agreed rouwkoop amount, he will be acting in accordance with the terms of the agreement and his withdrawal will not constitute a breach of contract. 

 

It is not regarded as a penalty and it is not subject to the provisions of the Conventional Penalties Act. This is clearly very distinguishable from a penalty clause which would come into operation only where there was a breach of contract.

12 Sep 2023
Author ESI Attorneys / GoLegal