Your deposit is gone
Written by Julie Barkla
If you cannot settle your property purchase contract, there’s a good chance your deposit is gone.
#propertylaw
The decision of the Court of Appeal of the Victorian Supreme Court in Gayed v Yuan [2024] VSCA 85 (“Gayed”) provides a timely reminder that courts will be most reluctant to order that a vendor refund a property purchaser their deposit , if the purchaser is unwilling or unable to complete a contract of sale in accordance with its terms.
Gayed involved a contract of sale for a residential property in Balwyn for which the purchasers agreed to pay $3,190,000 and tendered the usual 10% deposit ($319,000). As is increasingly occurring in the current property and lending market, as I’ve noted previously, the purchasers found themselves unable to secure finance for the balance of the purchase monies. By advising the vendor’s solicitor that they would be unable to complete the contract they thereby repudiated the contract, which repudiation was accepted by the vendor, ending the contract. The vendor later re-sold the property for $3,500,000. The purchasers then issued proceedings for the recovery of the $319,000 deposit, seeking that the court exercise the discretion conferred by section 49(2) of the Property Law Act 1958 (Vic) to order this refund.
The status of a deposit paid, where a vendor apparently suffers no loss as a consequence of a purchaser’s default, has often been an area of some confusion. Some people have the intuition that if a vendor re-sells their property following a default at a profit, especially a sizeable profit, there is something improper or inequitable about that vendor also retaining the first purchaser’s deposit. For instance, a vendor sells their home to Purchaser 1 for $4,000,000 and collects a $400,000 deposit. Purchaser 1 is then unable to secure the finance necessary to complete the purchase and the contract is brought to an end. The vendor then sells to Purchaser 2 for $6,000,000 and collects not only an additional $2,000,000, but also retains Purchaser 1’s $400,000.
The Court of Appeal in Gayed, however, made quite clear that the courts would rarely intervene in this situation. Justices Beach and Orr JJA noted that “the authorities in this area are clear and the mere fact that a vendor receives a windfall payment is generally not a sufficient basis itself to justify the return of the deposit to a defaulting purchaser.”
Perhaps the area of most interest to property lawyers in Gayed was the court’s treatment of the provision in most contracts of sale for residential property which explicitly entitles a vendor to forfeiture of a deposit up to 10% of the purchase price (General Condition 28.4(a)). Where a purchaser defaults under a contract of sale, the contract is ended usually by either:
- the vendor serving a Rescission Notice (with the purchaser not rectifying the default set out in the notice within 14 days); or
- the purchaser expressing an intention not to complete the contract, which amounts to repudiatory conduct on the purchaser’s part, which repudiation is then accepted by the vendor.
In this second scenario, the vendor is not required to serve a notice.
The court in Gayed held that General Condition 28.4(a) only applied where a vendor had served the relevant notice ie not when a contract had been effectively repudiated. This did not assist the purchasers in Gayed as the court instead regarded the deposit as an “earnest of performance” still properly forfeited. Despite this, I expect this finding as to the restricted application of General Condition 28.4(a) will have property lawyers rushing to draft special conditions which clearly state that the deposit shall be forfeited to the vendor if the contract is ended by a repudiation initiated by a purchaser.
Property lawyers must ensure that purchaser clients understand the unlikelihood of the recovery of their deposit in the event that they cannot complete a contract. If a vendor’s hands are clean and their vendor statement satisfies the requirements of section 32 of the Sale of Land Act 1962 (Vic), a purchaser will have few options but to lick their wounds.
