Examines the Court of Appeal ruling in Midill (97PL) Ltd v Park Lane Estates Ltd on whether the court should exercise its discretion to return a deposit paid under a contract for the sale of a property where, despite the claimant having defaulted on its purchase, the owner obtained a higher price than would have been paid by the claimant when it subsequently sold the property to a third party. Considers the need for special or exceptional circumstances to be present to override the rule that deposits were to be forfeited upon the purchaser's default

Pawlowski, Mark

English

Greenwich Academic Literature Archive

Greenwich Academic Literature Archive (GALA)– the University of Greenwich open access repositoryhttp://gala.gre.ac.uk__________________________________________________________________________________________Citation for published version:Pawlowski, Mark (2008) Returning to deposits... Property Law Journal, 221. pp. 8-10. ISSN 1461-0752Publisher’s version available at:__________________________________________________________________________________________Please note  that  where  the  full  text  version provided on GALA is  not  the  final  published version, the version made available will be the most up-to-date full-text (post-print) version as provided by the author(s).  Where possible, or if citing, it is recommended that the publisher’s  (definitive) version be consulted to ensure any subsequent changes to the text are noted.Citation for this version held on GALA:Pawlowski, Mark (2008) Returning to deposits... . London: Greenwich Academic Literature Archive.Available at: http://gala.gre.ac.uk/1421/__________________________________________________________________________________________Contact: gala@gre.ac.uk8 Property Law Journal 1 December 2008CONVEYANCINGReturning to deposits…Can a failed purchaser recover their deposit if the vendorsubsequently sells the property at a higher price? Mark Pawlowski examines a recent Court of Appeal ruling ‘The crucial point was thata deposit was an earnest forthe performance of thecontract and, consequently,could be retained by thevendor on the purchaser’sdefault regardless ofwhether the vendor hadsuffered any actual loss as aresult of non-completion ofthe sale or the amount ofthe deposit.’Mark Pawlowski is a barrister and professor of property law in thedepartment of law at theUniversity of GreenwichIn an article earlier this year (‘Return ofdeposits’, PLJ209, 28 April 2008, p18) Iventured to suggest that an increase inmarket value would not, on its own, jus-tify the return of a purchaser’s depositunder s49(2) of the Law of Property Act1925. At best, this was merely a factor thathad to be weighed against the need forcertainty in transactions for the sale ofland where the clear expectation of theparties was that a deposit would beretained by the vendor if the purchaserfailed to complete the sale.Most recently, the Court of Appeal inMidill (97PL) Ltd v Park Lane Estates Ltd &anr [2008] has affirmed the view of thetrial judge, HHJ Mackie QC, that, in orderfor the Court to exercise its discretionunder s49(2) to order the repayment of adeposit, there needed to be somethingspecial or exceptional to justify overrid-ing the ordinary contractual expectationsof the parties that the purchaser wouldlose its deposit if it defaulted. The facts Gomba International Investments Ltd(Gomba) owned a company (Park LaneEstates Ltd) whose only asset was acommercial property in Park Lane,London. The claimant (Midill (97PL)Ltd) entered into a contract with Gombato buy the company. The contract pro-vided for the payment of a 10% depositwhen the contract was signed, a furtherpayment later on, and the balance oncompletion.The claimant made the interim payments but failed to complete the pur-chase. Gomba then sought to rescind thecontract and later sold the company to athird party for a higher price than thatoriginally agreed with the claimant. Oneof the issues in dispute between the par-ties was whether the Court shouldexercise its discretion under s49(2) andorder Gomba to repay the deposit. Theclaimant argued that the resale of theproperty for a profit amounted to a spe-cial circumstance to justify the return ofthe deposit. Gomba, on the other hand,submitted that it was entitled to keep thedeposit irrespective of the profit it hadmade on resale.First-instance decision Although, strictly speaking, the transac-tion was a contract for the sale of sharesin a company (and not land), it was con-ceded by Gomba that the share sale fellwithin s49(2) as being ‘a contract for thesale or exchange of any interest in land’. Having disposed of this preliminarypoint, HHJ Mackie QC held that Gombawas entitled to keep the deposit despitethe fact that it had resold the propertyfor a higher price. Applying the guid-ance given by Arden LJ in Omar v ElWakil [2001], the starting point was thata deposit was an earnest for perform-ance and therefore should not normallybe ordered to be repaid unless the cir-cumstances for exercising the Court’sdiscretion under s49(2) were excep-tional. Even if the vendor had obtained a profit on resale, this was only a factorto be considered as part of all the circumstances and was by no meansconclusive. In the words of the learnedjudge (at para 32):If the position were otherwise and the lia-bility to repay the deposit depended uponsome future sale price, there would beconsiderable uncertainty possible for alengthy period. That would create pre-cisely the uncertainty which a fixeddeposit is intended to avoid.In the instant case, according to thejudge, there was no special factor that  jus-tified departing from the normal rule. ThePLJ221 Pawlowski p8-10.qxp  21/11/08  15:56  Page 81 December 2008 Property Law Journal 9CONVEYANCINGclaimant was a ‘sophisticated investor’that was fully aware of the risks involvedin failing to complete the sale.Court of Appeal ruling Carnwath LJ (with whom May andKeene LJJ agreed) found no difficulty inupholding the approach taken by thetrial judge. In particular, it was apparentfrom the authorities that there needed tobe something special or exceptional tojustify overriding the normal rule that adeposit would become forfeited on thepurchaser’s default.(a) Weight of authority In Michael Richards Properties Ltd v StSaviour’s Parish, Southwark [1975] Goff J,in refusing to order the return of thedeposit, concluded that the jurisdictionunder s49(2) should only be exercised‘sparingly and with caution’. Similarly, inCole v Rose [1978] HHJ Mervyn DaviesQC opined that an order under s49(2)would only be appropriate if there were‘some special circumstances’ in the case,being circumstances that suggested that itwould be unfair or inequitable that thepurchaser should lose its deposit. Moresignificantly, in Bidaisee v Sampath [1995],a case involving the return of a depositunder an identically worded provision ina Trinidad and Tobago statute, the PrivyCouncil concluded that the absence ofany loss by the vendor (because it hadresold at a profit) did not of itself providea sufficient reason for the Court to exer-cise its discretion in favour of a defaultingpurchaser. In the words of Lord Nicholls:The traditional deposit paid by a buyerwhen he enters into a contract is anearnest for the performance of the contract, and can be retained by the sellerif the buyer defaults. Equity does notregard this as a penalty against which itgranted relief… Section 49(2) has neverbeen understood as intended to overrulethat principle, and it should not be sointerpreted or applied.Thus, according to his Lordship, therehad to be ‘something more’ to justify theCourt’s intervention. In that case, thevendor’s profit in reselling the land at ahigher price was largely offset by theamount of interest that the vendor wouldhave received had the sale been com-pleted on time. In addition, the Courtwas not made aware of the reason for thehigher price. The enhanced price couldhave been due to movements in landprices generally, as opposed to thevendor obtaining a particularly goodprice for the specific land in question.Because this was a matter of speculation,it did not, according to Lord Nicholls,form a proper basis upon which theCourt could exercise its discretion.More recent cases have adopted asimilar approach. In Omar, referred toabove, Arden LJ expressed the view that,in the context of a conveyancing transac-tion, it was common knowledge that if apurchaser failed to complete, it waslikely to lose its deposit and so, it wasimportant that there should be certaintyattaching to the consequences of payinga deposit. In her view, the circumstanceshad to be ‘exceptional’ in order to makeit appropriate for the Court to exerciseits discretion under s49(2). This approach was followed mostrecently in Aribisala v St James’ Homes(Governors Dock) Ltd [2008] (whichformed the subject of my earlier article,mentioned above), in which Floyd J con-cluded, inter alia, that although thevendor’s profit on resale (amounting to£366,000) was a factor to be taken intoaccount, it was not decisive and certainlynot enough (by itself) to make the situa-tion different from the ordinary casewhere a deposit was not refundable. As a factor to be taken into account, a profit on resale could be significant inappropriate circumstances, but only inassessing ‘the overall economic impact’on the vendor in the purchaser failing tocomplete. In Tennaro Ltd v Majorarch Ltd[2003], for example, Neuberger J tookinto account the fact that the vendorThe claimant argued that the resale of the propertyfor a profit amounted to a special circumstance tojustify the return of the deposit.“The Practical Lawyer gives me quick and simple updates everymonth, alerting me to hot topics and developments in the law. I would recommend it to anyone.”Ben Crichton, Gordon DaddsMonthly updates on:• Commercial• Conveyancing• Crime• Employment• Family• Land• Landlord and tenant – commercial• Landlord and tenant – residential• Personal injury• Planning and environment• Procedure• Professional• Tax – VAT• Wills, probate and administrationFor a FREE sample copy: call us on 020 7396 9313, e-mail orders@legalease.co.uk or visit www.legalease.co.ukPLJ221 Pawlowski p8-10.qxp  21/11/08  15:57  Page 91 December 200810 Property Law Journal CONVEYANCINGcould have sold the property at a higherprice but declined to do so withoutgiving any proper explanation for therefusal. Significantly, the purchaser itselfhad found the new purchaser (whichwas willing to pay more than the con-tract price) prior to the completion date.The decision, therefore, to exercise thediscretion under s49(2) turned verymuch on special facts.(b) Wider view Against the more restrictive approachapparent in Omar lies the view taken byBuckley LJ in Universal Corporation v FiveWays Properties Ltd [1979], who opinedthat the Court had an unqualified dis-cretion under s49(2) to order repayment of a deposit when this would representthe ‘fairest course between the parties’, subject only to the discretion being exer-cised judicially and with due regard toall the relevant circumstances.This wide interpretation of the sub-section has been followed in some cases(notably, Dimsdale Developments (SouthEast) Ltd v De Haan [1984], albeit withsome reluctance) and has found supportamongst several academic writers (seeJones and Goodhart, Specific Performance(2nd ed), p304-305, Treitel, The Law ofContract (12th ed), p1084-1086 and Goffand Jones, The Law of Restitution (7th ed),para 20-035) who have felt that there isno need to unduly restrict the court’sdiscretion by reading into the subsectionadditional hurdles or requirements. Inthis connection, the wording of s49(2)expressly provided for an unfettereddiscretion entitling the court to order the repayment of a deposit ‘if it thinksfit’ to do so.(c) Balance of judicial view Despite the academic support for the so-called ‘wider view’ expressed byBuckley LJ in Universal Corporation, theCourt of Appeal in Midill felt bound toadopt the ‘most recent, considered guid-ance’ provided by Arden LJ in Omar,which clearly had the benefit of being inline with the balance of judicial opinion,including, most notably, the PrivyCouncil in Bidaisee, referred to above. The crucial point, therefore, was that adeposit was an earnest for the perform-ance of the contract and, consequently,could be retained by the vendor on thepurchaser’s default regardless of whetherthe vendor had suffered any actual lossas a result of non-completion of the saleor the amount of the deposit. Essentially,in the words of Lord Nicholls in Bidaisee,there had to be ‘something more’, or (asexpressed by other judges) ‘somethingspecial or exceptional’, to justify theCourt’s intervention under s49(2).Conclusion The question, of course, remains as towhat will constitute ‘something more’ inthe given circumstances of a particularcase. Interestingly, the Court of Appealdid not doubt the correctness ofNeuberger J’s decision in Tennaro, men-tioned above, as being a special casewhere the facts were highly unusualgiven the very attractive (alternative)offer made to the vendor before the timeof completion (which had been arrangedby the purchaser itself) and the lack ofany stated reason by the vendor forrejecting it. By contrast, however, on thefacts in Midill it was clearly not enoughthat the vendor had sold at a higherprice some months after the date forcompletion. The delay in reselling dis-tinguished the case from Tennaro but,more importantly, there was nothing toindicate that the resale price was excep-tional, given movements in the marketgenerally. In the words of Carnwath LJ:… there is no obvious reason why the pur-chaser should have the benefit of anysuch price rise… it was the vendor whohad borne the risk and cost of holding theproperty during the intervening period.It seems, therefore, that the mere factthat prices have increased in a risingmarket will not be enough to persuade a court to order the repayment of thedeposit. However, the position may bevery different if the vendor has beengiven the opportunity (by the purchaser)prior to the completion date to sell toanother purchaser who is willing to paymore than the contract price. ■In the context of a contract for the sale of land, a seller’s right atlaw to forfeit the purchaser’s deposit is mitigated by s49(2) of theLaw of Property Act 1925, which gives the courts a widediscretionary power to order the repayment of any deposit ‘if itthinks fit’, dependent on a general consideration of the conduct ofboth parties (especially the purchaser), the gravity of the matters inquestion and the amount at stake (Schindler v Pigault [1975] andUniversal Corporation v Five Ways Properties Ltd [1979]).Although thejurisdiction is statutory, nevertheless, its discretionary character hasbeen held to be at least akin to equitable relief against forfeiture(Schindler, above, at 336, per Megarry J) The subsection provides:‘Where the court refuses to grant specific performance of a contract, or in any action for the return of a deposit,the court may, if it thinks fit, order the repayment of any deposit.’While any limitation or restriction on the scope of the courts’discretion under s49(2) would appear to be inappropriate in viewof the broad wording of the subsection itself, it is apparent that anumber of guidelines have emerged from cases as to thecircumstances in which the discretion to relieve from forfeitureshould be exercised in favour of a purchaser.Section 49(2) of the Law of Property Act 1925: a reminderAribisala v St James’ Homes (Governors Dock) Ltd [2008] EWHC 456 (Ch)Bidaisee v Sampath[1995] NPC 59Cole v Rose [1978] 3 All ER 1121Dimsdale Developments (South East) Ltdv De Haan (1984) 47 P & CR 1Michael Richards Properties Ltd v St Saviour’s Parish, Southwark [1975] 3 All ER 416Midill (97PL) Ltd v Park Lane Estates Ltd & anr[2008] EWHC 18 (Ch); [2008] EWCA Civ 1227Omar v El Wakil [2001] EWCA Civ 1090Schindler v Pigault (1975) 30 P & CR 328 Tennaro Ltd v Majorarch Ltd [2003] EWHC 2601 (Ch)Universal Corporation v Five Ways Properties Ltd [1979] 1 All ER 552PLJ221 Pawlowski p8-10.qxp  21/11/08  15:57  Page 10

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