What You Need To Know About Breach & Penalty Clauses In Property Sales Agreements

When you are in the process of buying or selling property, one of the most critical documents you will encounter is the offer to purchase. This document serves as the agreement between the buyer and seller, outlining their respective rights and obligations.

Within this agreement, certain clauses require careful attention, particularly those related to breaches and penalties. Understanding these clauses is vital for ensuring a smooth and transparent transaction that protects the interests of both parties involved. 

Breach of Contract Clause:

Once the offer to purchase is signed by both parties, it becomes a legally binding contract governed by contract law. A standard provision within this agreement is the breach of contract clause. This clause comes into play if either party fails to fulfil their obligations without a valid reason.

In the event of a breach, the affected party usually has options outlined in the breach clause. They may give the defaulting party an opportunity to remedy the breach. If the defaulting party fails to do so, the aggrieved party can typically choose to cancel the contract and seek damages or pursue legal action for specific performance, which compels the defaulting party to fulfil their obligations. If the aggrieved party opts to cancel the contract, they must consider the Conventional Penalties Act of 1962 when quantifying damages.

Forfeiture Clause (Penalty) or Non-Refundable Clause:

There is a common misconception that if a purchaser breaches the contract, the seller automatically gets to keep the deposit. However, a forfeiture clause may not entitle the seller to retain all the funds automatically.

In terms of our case law, Matthews v Pretorius (1984) (3) (SA547W) and the Conventional Penalties Act 15 of 1962 ("the Act"), any penalty or liquidated damages contained in a contractual obligation 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 such extent as it may consider equitable under the circumstances, taking in due consideration the interests of all concerned.

This means that any forfeiture stipulation resulting from the cancellation of an agreement, including non-refundable deposits, as well as the retention of certain monies already paid by a purchaser as liquidated damages, will be subject to the measurement as described in the Conventional Penalties Act.

Estate agents should be cautious about creating false expectations regarding non-refundable deposits. Conveyancers, too, must follow legal guidelines when distributing funds in cases of contract cancellation due to breach.

Rouwkoop Clause:

Occasionally, an offer to purchase may include a rouwkoop clause, distinct from forfeiture clauses. Rouwkoop comes from our common law and the word is derived from the Dutch words meaning "regret" and "purchase". It allows a party to withdraw from the contract in accordance with the terms of the agreement, by paying an agreed-upon sum. Unlike forfeiture clauses, the rouwkoop clause does not require the withdrawing party to be in breach.

The key difference between forfeiture clauses and rouwkoop clauses lies in the circumstances under which they are invoked. While forfeiture clauses apply to breaches, rouwkoop clauses apply to voluntary withdrawals.

Regrettably, many agreements have confused the law and merged these two clauses. It is common to see a clause in a sale agreement providing that, if the purchaser breaches the agreement and the seller cancels the agreement as a result, the purchaser will forfeit his/her deposit as rouwkoop. This is an incorrect use of the concept of rouwkoop.

Very few modern agreements contain a proper rouwkoop clause. It seems to be unpopular nowadays because South Africans appear to desire certainty that the other party is locked into the agreement for the duration of the agreement.

Conclusion:

It is essential to understand the nuances of breach and penalty clauses in property agreements to avoid misunderstandings and legal disputes. By grasping these provisions, buyers, sellers, and agents can navigate property transactions with clarity and confidence, ensuring fair treatment for all parties involved.

It is clear that non-refundable deposits are 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 a Deed of Sale must be clearly distinguished from the penalty clauses above as it is not subject to the provisions of the Conventional Penalties Act.

It is also advisable to provide in property sale agreements that, if a buyer breaches the agreement and the seller cancels the agreement as a result, the attorneys are authorised to hold the deposit in trust pending determination of the seller's damages. In this way, once the seller's damages are quantified, the seller will have access to the deposit without having to chase the purchaser, and the purchaser will receive the difference, if the damages are less than the deposit.