If you are selling land and exchange contracts with a buyer with completion on a future date, it is important to take a deposit.  The deposit provides a financial incentive for the buyer to complete.  If you do not collect a deposit or if you accept a deposit of less than 10% then you should ensure the contract provides for the difference to be made up to 10% if the buyer fails to complete on the contractual completion date.

If the buyer fails to complete on the contractual completion date, notice to complete should be served on the buyer giving the buyer the period of notice specified in the contract within which to complete.  You must be ready, willing and able to complete yourself so that:

  • completion can take place but for the default of the buyer; and
  • the amount to be paid on completion will be sufficient to enable the property to be sold free of any mortgage.

If the buyer does not complete within the time given in the notice to complete, you may rescind the contract and:

  • forfeit and keep the deposit and accrued interest;
  • resell the property;
  • claim damages.

Instead of choosing to rescind the contract you could negotiate a new completion date with the buyer which should be documented by deed if no new consideration is given for agreeing the new completion date.

If you do rescind the contract, the buyer could seek an order from the court for the return of the deposit pursuant to Section 49(2) of the Law of Property Act 1925.  The court has discretion to make such an order or any other order, including an order for costs, as it thinks fit.  However, recent case law (Solid Rock Investments UK Ltd v Reddy (2016)) has confirmed that the court will only make such an order in special or exceptional circumstances even where there is an economic benefit to the seller in rescinding the contract and a buyer has offered to complete with payment of interest and costs.  Each case and circumstances in which a court may order the return of the deposit will be fact-specific but such circumstances could include a delay on the seller’s part in providing responses to requisitions or where there are outstanding title issues.

If a buyer has paid a deposit of more than 10%, there is judicial authority (Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993]) to suggest that such a deposit may be an unenforceable penalty with the effect that the entirety of the deposit, and not just the amount over 10%, is not capable of being forfeited and retained by the seller.  Whilst there has been judicial authority to the contrary (Amble Assets LLP v Longbenton Foods Ltd [2011]) the position is not certain and, if agreeing a deposit of more than 10%, consideration should be given as to whether there are special circumstances to justify a larger deposit.

If you are buying land:

  • you should ensure that you have all funds necessary in order to complete on the contractual completion date; and
  • if you cannot complete on the agreed completion date, you could seek to agree a variation to the contract to extend the completion date so as not to be at risk of rescission and the forfeiture of the deposit.