Common sense would suggest that the larger the deposit taken from a purchaser the more secure a seller should feel. Recent case law suggests the opposite may be true. A seller who obtains or demands more than the usual 10% deposit risks that deposit being treated by the courts as a penalty, and penalty clauses are legally unenforceable.
If a deposit is found to be excessive, the seller’s right to forfeit the deposit may be unlawful, and lead to the refund of the entirety of the deposit.
In ParkingEye Limited v Beavis (2015) the Supreme Court ruled that “where the stipulated deposit exceeds the percentage set by long-established practice the vendor must show special circumstances to justify that deposit if it is not to be treated as an unenforceable penalty”. The courts have been clear that “long established practice” means 10% of the purchase price. Care must be taken with contract deposit clauses providing for more than 10%.
Some situations may arise where a deposit of more than the usual 10% is not unreasonable, perhaps such as:
a) when a buyer is situated overseas and it would be more difficult to pursue them in the courts,
b) if the seller is carrying out works in the premises for the buyer between exchange and completion, or
c) if the buyer will be in occupation between exchange and completion (although this in itself could present other risks).
Careful consideration should be given prior to asking for deposits greater than 10%. Please contact the Real Estate team for more information.
This blog post was written by Andrew Boyd. For further information, please contact:
Philip Gregory, partner, Real Estate
T: 0113 204 1162