The Facts
Buyers and sellers enter into property sale contract
In November 2020, two parties signed a contract for the sale of a residential property in Sydney. The purchase price was set at $2,350,000. On the front page of the contract, that both parties agreed to and signed, it was accepted that the buyers would pay a deposit of 10% of the purchase price, being $235,000.
Contracts were exchanged conditionally, subject to a ten-day cooling off period. The cooling off period was subsequently extended at the request of the buyers, but nevertheless expired on 12 January 2021.
From the date of exchange of contracts to the date for completion, the owners had only received $15,875 from the buyers ($219,125 less than the stipulated deposit). The buyers did not provide a valid explanation for their failure to pay the full deposit.
Property owners issue Notice to Complete
The agreed date for completion was 29 January 2021. On 1 February 2021, the owners of the property served a Notice to Complete upon the buyers, stating that “…should you fail to complete the contract for sale of land… [by 15 February 2021] then you shall be in breach of contract and the vendors shall exercise all other rights and remedies as are available to them”.
When the sellers had not received payment by that date, they served a Notice of Termination on the prospective buyers and subsequently relisted their property on the market.
New buyers were found and the property was sold for $180,000 more than the price the original buyers had agreed to pay.
Sellers sue buyers for unpaid amount of deposit after deal falls through
Despite the gain they had realised in this favourable transaction, the property sellers sued the original prospective buyers in the Supreme Court of NSW, seeking to recover the unpaid amount of $219,125 of the deposit money from those buyers.
For their part, the original buyers argued the court should grant them relief against forfeiture of the deposit, as the minimal inconvenience suffered by the property sellers would make forfeiture of the deposit unjust.
Expert commentary on the court's decision
Supreme Court rules in favour of property sellers
In Proietti-Formaggio v Sacca [2022] NSWSC 1019, the Supreme Court of NSW found in favour of the owners, the Proietti-Formaggios (the couple selling the property in Sydney’s West Pennant Hills). Justice Darke ordered that the Saccas (the couple who had entered the contract to buy the property) pay the sellers the remaining deposit of $219,125, plus pre-judgment interest calculated from 1 February 2021.
Court rejects claim that sellers agreed to accept less than ten per cent deposit
In attempting to avoid paying the unpaid amount of the deposit, the Saccas and their solicitors utilised a two-pronged approach.
First, they argued that the Proietti-Formaggios had agreed to accept a deposit of less than ten per cent of the initial purchase price. However, when the buyers and their lawyer were cross-examined during the court proceedings, they gave evidence to the contrary.
Justice Darke noted that acceptance of a reduced deposit by the sellers could not be deduced from their lack of complaint and initial absence of demand for payment.
Would it be unjust or inequitable for the sellers to keep the deposit?
Secondly, the buyers relied upon section 55(2A) of the NSW Conveyancing Act 1919, arguing that the court should grant them relief against forfeiture of the deposit, because it would be unjust or inequitable to allow the sellers to keep it.
It was a strong factor in favour of the buyers that the sellers only suffered minimally as a result of the Saccas’ conduct. However, the court pointed out that the fact the property was resold for an increased price was not normally in itself sufficient to warrant a court order providing relief to the buyers from forfeiture of the deposit.
The court noted that the proper function of a deposit is in providing a sanction, so that buyers treat the making and completing of contracts with due seriousness.
To further analyse this question, the court examined past cases dealing with similar disputes.
Increase in value of property does not relieve buyer of responsibility to pay deposit
In Barrett v Beckwith (No 2) (1974) 1 BPR 9439, Justice Holland adjudged that although the value of a parcel of land had increased by 30 per cent, the buyers nonetheless owed the full deposit to the sellers, as giving the buyers relief against forfeiture purely on the basis that the value of the property had increased would mean that any buyer could default in such circumstances, without any fear that the deposit was in jeopardy.
In our case, Justice Darke used similar reasoning.
Buyers had ample opportunity to rescind contract
Another factor which worked against the purchasers was that due to the extensions to the cooling-off period that had been granted by the Proietti-Formaggios, the Saccas had had several weeks between 30 November 2020 and 12 January 2021 to rescind the contract.
If they had chosen to do so, they would have been liable to forfeit only 0.25% of the purchase price, or $5,875, to the vendors. However, the buyers did not seek to rescind the contract before the end of the cooling-off period.
Importance of communication in contractual dealings and legal proceedings
There were two distinct communication failures on the part of the prospective buyers in this case. The first was their failure to communicate with the sellers, respond to their requests for information and keep them up to date regarding progress in finalising the sale of the property.
Twice the sellers emailed, asking to be sent a copy of the conditional loan approval which the buyers had purportedly received, but did not receive a reply to either email.
Faced with silence in response to multiple emails requesting information, the sellers had few options but to issue a Notice to Complete and a Notice of Termination.
The second – arguably more damaging – communication failure by the buyers was that they did not provide an adequate explanation to the court of why they did not fulfil their contractual obligations.
As the judgment notes with a hint of surprise and reproach: “ordinarily it would be expected that a purchaser seeking relief under section 55(2A) would provide a full account of the circumstances that led to the forfeiture of the deposit”.
In the absence of such an explanation, the court was not convinced that the circumstances warranted the return of the deposit to the buyers. As well as failing in their bid to keep the deposit, the buyers were required by the court to pay the sellers’ legal costs.
We can only speculate whether the outcome might have been different if the buyers had fully explained to the court why they had failed to meet their contractual obligations.