Under South African common law the general rule that applies when an agreement fails is that the parties must restore the status to the position they were in before the agreement was signed, unless both parties have agreed that there is an exception to this rule. When there is a sale of a property involved and the buyer puts down a deposit but is seen to have defaulted on the agreement, the seller can cancel and keep the deposit, says Lanice Steward, managing director of Knight Frank Residential SA.
But what does this mean to the buyer and why would he pay a deposit?
Usually the payment of a deposit is advisable when a purchaser wishes to show his good intent and commitment to the purchase of the property. In the majority of cases the buyer is required to get finance and in most contracts there is a 20 to 30 day provision made so that the buyer can apply for a bond (and this time frame should be enough). The seller would have to take his home off the market for this period so it only seems fair that the buyer commit in some way, hence the deposit payment, she said.
The buyer might, too, have to sell his property, which could take anything from one to six months to sell.
In some instances, if the bond is very high or a property very difficult to sell, the agreement will make an allowance for the seller to continue to market his property and accept another offer should he receive one that is more acceptable, i.e. with no suspensive conditions. This does not have to be a higher offer, just more acceptable, i.e. cash or an offer not subject to a sale of another property, then 72 hours or three working days would be given to the first buyer to either lift the suspensive condition and accept the legal responsibility of the agreement, or walk away from the purchase, said Steward.
If they walk away, their deposit is refundable, or they don’t receive the necessary finance, their deposit is refundable, plus interest but minus the administration charges. However, any company holding a deposit will charge an administration fee, which is part of the costs of running a trust account (which is very expensive), said Steward.
In a recent judgement between Royal Anthem Investments v Lau, the seller tried to claim the deposit amount that had been paid to the conveyancing attorney (which was being held in a trust account) because the buyer defaulted and could not raise the necessary finance in the time stipulated. The clause in their sale agreement read: “If the purchaser is in default of this agreement and refuses to rectify the default within 14 days after acceptance of this written notice, the seller will be entitled, …….., to cancel the agreement and to keep any other amounts payable,….”
In this case, after going to the Supreme Court of Appeal, the judge held that the deposit did not fall within the words “any other amounts payable” and the deposit should be returned to the buyer.
In the above case, the transfer fee was also paid over to SARS ahead of time, which is unusual and should not be done until all the suspensive conditions are fulfilled and the sale is confirmed, said Steward. This amount, however, is usually refunded but without interest and does take time for the refund to be processed.
When is the deposit not refundable?
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. Most agreements (some do differ) will also have a clause enabling the seller to cancel the agreement but retain the right to sue for damages.
“This is a warning to be careful what you contract into, if there are no suspensive conditions and you don’t fulfil your legal obligations – you have inconvenienced the seller – and therefore will lose your deposit,” she said.