In the UK, property purchases proceed in two stages. The first is when there is an 'exchange of contracts', when a deposit (normally ten per cent of the purchase price although sometimes less on negotiation) is paid. On completion, the balance of the purchase price is paid.
Where the vendor is a developer, it is common for the contract to specify that a ten per cent deposit is to be paid, but the developer may well agree to a smaller sum being paid to reserve the property.
In between the exchange of contracts and completion, the prospective purchaser normally has to arrange finance for the completion, which usually involves obtaining a mortgage. Sometimes, this proves impossible, or the buyer's circumstances change so that they cannot complete the purchase. In the situation in which the purchaser has paid a deposit but cannot complete the purchase on the due date, the deposit normally ends up being forfeited by the purchaser and retained by the vendor, who will then re-market the property.
Where a deposit is paid which is less than that stipulated in the contract, the developer may serve a notice on the purchaser demanding that he or she completes the purchase. If this does not go ahead, the developer issues a demand for the balance of the deposit unpaid.
And that, as far as most people believe, is that. If the vendor resells at a loss within a certain time, most contracts require that the purchaser makes up the deficit. On the other hand, if there is a loss the court can order (s.49 of the Law of Property Act 1925) that a vendor must return to the purchaser any amount of deposit received in excess of the loss they have suffered. If no loss is suffered, then the deposit should be returned in full. If, for example, the property is quickly resold at the same or a higher price, there may be little or no loss to the developer. When the demand is for the balance of the deposit, such an argument is likely to be particularly compelling.
For purchasers facing a forfeiture of their deposit or being pressed for the balance of their deposit because they cannot complete, the message is clear: keep an eye on what has happened to the property subsequently. If it has been sold, there may be grounds for demanding a refund or for not paying the sum demanded. The price paid for a property can be ascertained from an enquiry at the Land Registry.
For developers who accept 'part-deposits', make sure you do not seek payments in excess of the loss you have suffered. Few purchasers will demand repayment of a part-deposit, but claims for the balance of a deposit are more likely to be contested strongly. If you need advice or wish to discuss this further, please contact Richard Holland on 0121 746 3300 or by email to r.holland@sydneymitchell.co.uk.
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