CAN YOU LOSE YOUR DEPOSIT WHEN A HOME SALE FALLS THROUGH?

Wording such as "non-refundable deposit" and "retain all monies paid" often appears in an Offer to Purchase (OTP) of immovable property. A few recent articles on the subject have called the term "non-refundable deposit" a myth. 

Payment of deposits is often encouraged to show the Seller that the Purchaser is serious about buying the property. Sellers also often feel a sense of security when non-refundable deposits are paid. They may wrongly believe they will be entitled to the money deposited if the sale is cancelled due to the Purchaser's breach. The relevant Clause in the OTP discussed above is called a Penalty Clause, which allows the Seller, amongst others, to:

"…Cancel the agreement and retain all monies paid on account of the Purchase Price as liquidated damages…;" or

"… cancel the agreement without any further notice and retain all amounts paid by the Purchaser as "Rouwkoop" and the Purchaser authorises any third party holding such monies to pay the same to the Seller…"

Where a contract is cancelled unilaterally or by agreement, the general rule is that the parties are required to return each other to their position immediately before the conclusion of the agreement. This means that a Purchaser who paid a portion of a Purchase Price as a deposit is generally entitled to be repaid that sum. However, the duty to restore could be excluded by an agreement between parties with respect to a penalty clause.

Any penalty or liquidated damages in an OTP is subject to the provisions of the Conventional Penalties Act 15 of 1962 ("the Penalties Act"). A Purchaser may, therefore, approach a court who may, in terms of section 3 of the Penalties Act, "reduce the penalty to such an extent as it may consider equitable in the circumstances," or the Purchaser may reach an agreement with the Seller. 

What is Rouwkoop?

In Mineworkers Union v Prinsloo 1948 (3) SA 831 (A), Tindall JA observed that the "proper sense" of the word "rouwkoop" is that of an agreed sum of money paid by a contractant "to get quit of liability in respect of the contract". Although it may refer to a portion of the purchase price forfeited upon breach, it may also refer more broadly to a payment that the contract allows a party to make to withdraw from a contract, in which case the "withdrawal does not amount to breach". 

The Gauteng High Court in the matter of Kondile v Nothnagel NO 49891/2016) [2018] ZAGPPHC 858 (19 August 2018) said that "Although the court in Mineworkers Union held that the rouwkoop clause was not a penalty at common law, this has been overtaken by section 4 of the Penalties Act, in terms of which such provisions are indeed to be regarded as penalties."

When an Agreement is cancelled, the Conveyancers may not pay the deposit or monies paid (by the Purchaser) to the Seller as liquidated damages even if the OTP contains a Penalty Clause which authorises them to do so. Doing so would be unlawful. The money will have to remain in the Conveyancers trust account until the Seller and the Purchaser reach an agreement or until a competent court makes an order. If the parties cannot reach an agreement and if there's no court order to the contrary, the Purchaser runs the risk of the Conveyancers holding the monies back until the property is resold, as the Seller's damages can often only be calculated once the net selling price/market value of the property is known. Suppose the Seller's damages are less than the deposit and monies held by the Conveyancers. In that case, the Purchaser will be entitled to the difference. If the Seller's damages are more than the monies held in trust, the Seller may approach the court for an order.

Instead of referring to non-refundable deposits, the Penalty Clause in an OTP should reflect the true legal position. The following wording has been suggested: "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."

Regards / Groete

Eberhard, Cheryl-Anne, Andre, Marzanne & Kume