Australia: Deposits and sale of land – take care when increasing deposits under deeds of variation

The story is familiar - a purchaser couldn't complete a sale of land contract¹. The vendor agreed to reset the time for completion, but on terms. The purchase price increased and so too the deposit. However, the increased deposit significantly exceeded 10% of the new purchase price: $12.65 million with a deposit of $2.6 million.

A deed of variation followed, which terms showed cognisance of the legal fragility in retaining or recovering deposits exceeding 10% of a purchase price². If the vendor terminated following the purchaser's default, the deed permitted the vendor to "retain" the deposit. It also prohibited the purchaser from challenging any retention exceeding 10% on the basis that it was a penalty.

Nothing went as planned. Following a purchaser's default, the vendor terminated. By then the purchaser had only paid about 3% of the deposit, and this is where the case becomes interesting.

Clause 9 of the standard form contract provides a vendor with useful rights on termination by streamlining the recovery of loss and damage. These include an almost absolute right to recover unpaid deposits, or portions of deposits, and a simplified process in obtaining recovery of deficiency on resale. This later right was not available as the vendor had resold the land for a considerable uplift.

The vendor still exercised its rights by suing to recover the unpaid portion of the deposit, claiming an entitlement upon the deed.

The standard clause says that if the vendor terminates for the purchaser's default, then "after the termination the vendor can keep or recover the deposit (to a maximum of 10%)". Relying on the deed, the vendor sought to recover significantly more than 10%. The issue was whether the standard clause limited the rights given by the deed because the standard clause seemed to limit recovery of any unpaid deposit amount "to a maximum of 10%".

The trouble for the vendor was that the rights under the deed only referred to the vendor 'retaining' the deposit, suggesting that the deed only applied where the deposit had been paid before termination. It said nothing about what happened after termination, which standard clause 9 appeared to address. Could the vendor now "recover" more than 10% or did the standard clause prevented this?

The court, construing the deed objectively, found against the vendor. The deed was read as only applying to the retention of any portion of the deposit paid as at termination. If the vendor wanted to recover the balance of the deposit, the deed was of no assistance. Instead, the standard terms needed to be relied upon, meaning that only a maximum of 10% was recoverable.

The purchaser was ordered to pay the vendor an amount so that the vendor received 10% of the purchase price, but no more.

While the deed would have been improved by the use of the words 'recover' and 'retain', this is not to say that the vendor would have been able to recover more than 10%, or that the purchaser could not raise the issue of a penalty, but merely the vendor at least would have had a chance. And as Mrs Malaprop says, a chance is as good as a holiday.

Footnotes

¹ Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd (No 2) [2017] NSWSC 866

² See, for starters: Luu v Sovereign Developments Pty Limited (2006) NSWCA 40; Iannello & Anor v Sharpe (2007) NSWCA 61; Rana v Dalla Costa [2014] NSWSC 1113; Sydney Developments Pty Limited v Perry Properties Pty Limited [2016] NSWSC 515.

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