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Can I have my deposit back?

18 Jan 2012

You would have thought that if you paid someone money under a contract that turned out to be void and unenforceable, you would be entitled to get your money back. The Court of Appeal does not necessarily agree. The case of Sharma and another v Simposh Limited, which came before that court last month illustrates why.

Deposits are usually paid by a buyer on exchange of contracts and form part of the purchase price for the property. The payment shows that the buyer is serious in its desire to buy, as it will forfeit the deposit if, ultimately it defaults in completing the purchase.

In this case, a purchaser of property paid to the developer a deposit as a preliminary to negotiating and subsequently entering into a binding contract for the sale and purchase of the same property. Terms for the sale and purchase had been discussed and agreed but ultimately no written contract was ever entered into. Not surprisingly, the buyer asked for its money back.  The developer refused to pay and the buyer sued.

There are strict statutory requirements to be adhered to for the creation of a binding and enforceable contract for the sale and purchase of land (the same requirements apply to the grant of leases).  The parties in this case did not comply with these statutory requirements, so there was no binding contract to sue under.

The Court of Appeal held that, despite there being no binding contract for the sale of the property, this fact did not prevent the deposit being lawfully retained by the seller.  This would be the case where ownership of the deposit was intended and did pass to the seller.  Whether this is the case, depends upon the intention of the seller and buyer.  The Court held that there was such an intention, so the buyer lost the deposit.

In such circumstances, a buyer can have a ‘second bite at the cherry’. The law does not generally like people to ‘get something for nothing’ – the principle against unjust enrichment.  In other words, for the seller in this case to be entitled to keep the deposit, there must have been something more than the intention – what did the seller provide in return for the deposit?

This is the principle applied where preliminary deposits are paid.  These are intended to be retained by the seller, whatever the outcome of the negotiations and whether a valid contract for the sale and purchase of the property is entered into.  What the seller gives in return for the deposit, will usually be either an agreement to take the property off the market or an agreement to allow the buyer the sale right to negotiate for the acquisition of the property for an agreed period.  Thus, the seller will have given to the buyer something for the deposit.

This case illustrates the need for clarity as to the terms for payment of any preliminary deposit paid prior to any binding contract and agreement as to when and in what circumstances any repayment may become due.