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Home / News and Insights / Blogs / Real Estate / 189: We cannot perform our contract because of COVID-19. Can we get the deposit back?

What then is a buyer to do if it fails to complete a contract by reason of COVID-19 induced difficulties? Let us assume it has failed to renegotiate a delayed completion as advised by government, but that the seller instead terminates the contract. In these circumstances the seller is entitled to forfeit the deposit and may also sue for damages if those are greater than the amount of the deposit.

Section 49(2) of the Law of Property Act enables the court to order the return a deposit to a buyer at its discretion. Of course if the contract is terminated due to a default of the seller, the buyer is entitled to the return of the deposit anyway: section 49(2) provides a mechanism to protect the buyer ‘when justice requires it’ in ‘mitigation of the vendor’s right at law to forfeit the deposit’ when the buyer is in default. When might justice require return of a deposit?

An older case (from 1975) is Schindler v Pigault. Here the buyer could not finance the purchase, but found a sub-purchaser who insisted on inspecting the property. The seller’s agents could not arrange an inspection and the sub-purchaser withdrew, after which the contract was terminated. The deposit was returned to the buyer because of the seller’s inability to honour its agreement to allow the inspection – although the court refused to decide whether the seller was obliged under the general law to allow the sub-purchaser to inspect.

In 1979, in Universal Corporation Lord Justice Buckley in the Court of Appeal preferred the view that:

‘the jurisdiction [under section 49(2)] is one to be exercised where the justice of case requires. In this connection I take the word ‘justice’ to be used in a wide sense, indicating that repayment must be ordered in any circumstances which make this the fairest course between the two parties.’

The court pointed out that a seller would retain its claim in damages against the buyer even if the deposit were returned, and that it was not necessary to prove the seller had acted in bad faith. Unfortunately the court did not decide whether the deposit should be returned or not since the application was by the seller to strike out the buyer’s claim in a case where the purchase funds were delayed by matters outside the buyer’s control.

Unfortunately from a buyer’s point of view, most recent cases favour sellers. The leading case is Omar v El-Wakil 2001. Against a complex set of facts, Lady Justice Arden preferred the view that a deposit should only be returned in ‘exceptional circumstances’. She pointed out that it was common knowledge that in a conveyancing transaction, if a buyer pays a deposit, he is likely to forfeit it if he does not fulfil the contract. It was important that there should be certainty attaching to the consequences of paying a deposit. It surely did not help the buyer’s case that he was found to be ‘a totally unreliable witness’.

Later cases have explored what may be ‘exceptional circumstances’. In Aribisala v St James’ Homes (Grosvenor Dock) Ltd (No 2) (2008) the buyer made ultimately unsuccessful efforts to raise the purchase money and renegotiate purchase contracts for two properties, including raising the price and delaying the completion date. He made further offers to purchase the properties at a higher price even after the seller rescinded the contracts and forfeited the deposits, but it seems likely the seller sold elsewhere at a higher price.

Floyd J said:

‘I think what needs to be looked at is how close the purchaser came to performing the contract, what alternatives he was able to propose to the vendor and how advantageous they would be compared with actual performance of the contractual terms. Where the purchaser simply could not perform the contract or offer any such alternative, then it would be exceptional, as Arden LJ held, for the deposit to be returned.’

The court said that the fact that a seller had not proved any loss could not, on its own, amount to a sufficient ground for ordering the return of a deposit where the purchaser was in breach, but the economic impact on the seller was a factor that the court could take into account in deciding whether the case was an exceptional one.

In Aribisala the buyer could not perform the contract because he could not raise the purchase monies at all. In Solid Rock Investments UK Ltd v Reddy (2016) funds became available two days after termination of the contract due to delays in Nigeria. Here the seller had offered the buyer two opportunities to purchase a delay in completion, both involving increases in the price. Again the seller ultimately sold elsewhere at an increased price (due to the grant of a planning permission applied for by the seller in the interim), and again the court refused to order the return of all or part of the deposit.

Will COVID-19 be seen as exceptional circumstances? On one view, it is hard to see anything that is more exceptional than an international pandemic during which governments restrict freedoms on a scale unprecedented outside wartime, and when the British Government at least pleads with parties to contracts to renegotiate them.

On the other hand, a seller seeking to forfeit a deposit will argue that the same British Government took no action to suspend performance of contracts and indeed makes special provision to exempt moving house from those same restrictions.

In addition a seller would say that a buyer’s failure to complete for reasons outside his control is not exceptional: for example, death of a buyer does not release him – or more accurately his estate – from the obligation to perform the contract. Either way, we expect to see such disputes come before the courts, especially where a seller has refused even to try to negotiate a delay in the completion date.

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