A deposit paid on exchange of contracts performs two different functions. It acts as a payment on account and will be applied towards payment of the purchase price. However, it also serves as a guarantee of performance because the seller will have the right to forfeit the deposit if the buyer defaults. Consequently, most sellers will refuse to exchange contracts with a buyer until they have received the full amount payable.
What, however, is the position if a seller accepts a cheque, which then bounces, or agrees to accept payment at a later date? Is failure to pay the amount due a repudiatory breach of contract that entitles the seller to terminate the parties’ contract at once? Previous authorities suggested that the seller must first warn the buyer of his intentions and give the buyer an opportunity to pay up: Millichamp v Jones [1982] 1 WLR 1422 and John Willmott Homes v Read (1985) 51 P&CR 90. However, the Court of Appeal has now spoken.
A deposit paid on exchange of contracts performs two different functions. It acts as a payment on account and will be applied towards payment of the purchase price. However, it also serves as a guarantee of performance because the seller will have the right to forfeit the deposit if the buyer defaults. Consequently, most sellers will refuse to exchange contracts with a buyer until they have received the full amount payable.
What, however, is the position if a seller accepts a cheque, which then bounces, or agrees to accept payment at a later date? Is failure to pay the amount due a repudiatory breach of contract that entitles the seller to terminate the parties’ contract at once? Previous authorities suggested that the seller must first warn the buyer of his intentions and give the buyer an opportunity to pay up: Millichamp v Jones [1982] 1 WLR 1422 and John Willmott Homes v Read (1985) 51 P&CR 90. However, the Court of Appeal has now spoken.
In Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445; [2011] PLSCS 283, the court decided that the buyer’s failure to pay the deposit on time cast doubt on whether it meant business. It noted that time is not in general of the essence of a contract, but differentiated between late payment of the deposit and late payment of the balance of the purchase price due on completion.
In the case of late completion, the seller can forfeit the deposit to cover any loss. By contrast, where a deposit remains unpaid, the seller has nothing except a fetter on his freedom to deal with his property. A right to terminate the contract for failure to pay the deposit on time restores the seller’s freedom to sell the property to someone else. Therefore, in the ordinary case, payment of the deposit is a condition of the contract and time is of the essence for payment.
The buyer accepted that this might be the position where a deposit is required at the very outset. However, the parties had agreed to postpone payment of the deposit until after the grant of planning permission for development. Consequently, the buyer claimed that time was not of the essence here.
The court disagreed. It accepted that, in some cases, there may be a distinction between a deposit required to be paid at the very outset and a deposit required to be paid part way through a contractual relationship. However, time will still be of the essence, unless something indicates that the deposit is less commercially and legally important.
There were no special circumstances that would justify a departure from the rule in this particular case. The buyer had had the money to pay, but had chosen not to do so. The deposit was payable on a fixed date well before the contractual completion date, and time was of the essence for payment.
Buyers be warned! If you are liable to pay – or top up – a deposit part way through a contractual relationship, it would be advisable to have all the necessary arrangements in place in good time, to avoid late payment.
Allyson Colby is a property law consultant
