Retention of Deposit on Breach of Contract

Often one is confronted with non-refundable deposits in offers to purchase of immovable property. In the same vein, most deeds of sale contain breach clauses worded that, in the event of a contractual breach on the part of the purchaser, which breach is not rectified within a specific period, the Seller can cancel such agreement and retain all amounts paid by the Purchaser in respect of the purchase price as a penalty.  This is not true and distant from the truth!!

In terms of our case law (see Mathews v Pretorius (1984) (3) SA547W) and the Conventional Penalties Act (Act 15 of 1962) (“The “Act”) any penalty or liquidated damages contained in a contractual obligation shall be subject to the provisions of the Act.  It specifically provides in section 3 as follows:

“If upon the hearing of a claim for a penalty, it appears to a court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extend as it may consider equitable under the circumstances:  Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor’s proprietary interest, but any other rightful interest that may be effected by the act or omission in question.”

A forfeiture stipulation resulting from the withdrawal from an agreement is also covered by the stipulations of the Act quoted above.  In other words, it applies to non-refundable deposits as well as the retention of certain amounts already paid by a Purchaser as liquidated damages.  The intangible aspect is that the Act refers to “any other rightful interest that may be effected by the act or omission in question” which does allow a portion of the penalty to compensate for the Seller’s pain and suffering as a result of the stress and anxiety caused by such cancellation.

The Court in applying the Conventional Penalties Act does not necessarily work out what the actual damages will be and need only reduce the penalty “to such extent as it may consider equitable under the circumstances.”  This means that the penalty can be far higher than the actual loss suffered.

In a recent case namely, Tshikala and Another v Myburgh and Another (1215/12) [2015], the following was held:

Even if I am found to have erred in finding that the cancellation was unlawful, the defendants would in any event not be entitled to retain the deposit paid by the plaintiffs in terms of the penalty stipulation in the agreement. The delay in transfer, which was ultimately the reason for placing the plaintiffs on terms in accordance with clause 12 of the agreement, was caused by the bond attorneys’ unreasonable demand for an Irish university’s verification of identity and place of residence in respect of the second defendant, when the plaintiffs have already complied four months earlier with the FICA requirements set. The defendants, by not testifying, failed to demonstrate any prejudice suffered by them as a result of a breach on the part of the plaintiffs. The defendants in the circumstances plainly out of proportion to any loss possibly suffer the retention of the plaintiffs’ deposit. In my view, it would be iniquitous to permit them in the abovementioned circumstances to retain the plaintiffs’ deposit. For the aforesaid reasons, the plaintiffs’ claim for their deposit minus certain deductions ought to succeed.

Estate Agents should be very careful not to create an expectation with a Seller that he/she will be entitled to all of non-refundable deposit or monies already paid to the Conveyancers on account of the purchase price if a purchaser breaches a deed of sale of immovable property and such breach results in a cancellation thereof.

Conveyancers are expected not to act as judge and jury when dealing with monies in their trust account when a dispute arises about who should be the rightful recipient of such monies once the deed of sale is cancelled.  The Conveyancers cannot be expected to pay the monies to either party in the absence of an agreement being reached between the parties or a competent court making an order.

It is however important to note that paying Estate Agent’s commission may be less problematic in the sense that the contract will provide when the Agent’s commission is payable and the same is a liquidated amount (provided the deed of sale is worded correctly).  The Agent will be entitled to such commission even if the Estate Agent again resells the property from the same Seller to another buyer subsequent to the cancellation taking place.  However, once again a Conveyancer is not entitled to assume that the agreement has been validly cancelled and that the Purchaser is at fault.  Accordingly, the Conveyancer will very often have to hold the monies in trust until such stage as the parties have reached an agreement or a court order is obtained.

It should be noted that the Seller’s damages will often only be liquidated once the property is resold.  The Seller will only have a claim in the event that the property is resold or valued for an amount that is not high enough to nullify the damages.  The Purchaser therefore runs the risk (failing a subsequent agreement being reached or a court ordering otherwise) of the Conveyancer holding the monies back until the property is resold.  This is so, as one of the components in calculating the Seller’s damages is the eventual net selling price or market value of the property.  This, however, does not entitle a Seller to deliberately resell the property at a lower price as one has a common law obligation to mitigate one’s damages.

Conclusion  

From the said case law and the provisions of section 3 of the referred to Act, sellers or their agents (conveyancers) “cannot take the law into their own hands”.  The penalty must be agreed upon between the parties, preferably in writing, or the Court must be sought to quantify the amount payable as a penalty.

A “rouwkoop” clause in a deed of sale must also be clearly distinguished from the penalty clause alluded to,as the “rouwkoop” clause is not subject to the provisions of the aforesaid Act.

A rouwkoop clause comes from our common law. The word is derived from the Dutch words meaning “regret” and “purchase”. In essence, it is a clause in an agreement that entitles a party to that agreement to pay an agreed sum of money in order to be allowed to withdraw (or purchase his/her freedom) from the agreement. If a purchaser in an agreement containing a rouwkoop clause withdraws from the agreement and pays the agreed rouwkoop amount, the purchaser will be acting in accordance with the terms of the agreement and his/her withdrawal will not amount to a breach of the agreement.

A rouwkoop clause is distinguishable from a penalty clause which would come into operation where there was a breach of the agreement.

Regrettably many agreements have confused the law and merged these two clauses. It is common to see a clause in a sale agreement providing that, if the purchaser breaches the agreement and the seller cancels the agreement as a result, the purchaser will forfeit his/her deposit as rouwkoop. This is an incorrect use of the concept of rouwkoop.

Very few modern agreements contain a proper rouwkoop clause. It seems to be unpopular nowadays because South Africans appear to desire certainty that the other party is locked into the agreement for the duration of the agreement.