PP 2011/164

A deposit paid on exchange of contracts performs two different functions.  It acts as a payment on account and as a guarantee of performance because the seller will be entitled to forfeit the deposit if the buyer defaults.  The customary deposit paid when contracting to buy land is 10% of the price – and it is widely believed that special circumstances will be required to justify a deposit in a larger sum. Amble Assets LLP (in administration) v Longbenton Foods Ltd [2011] EWHC 1943 (Ch) concerned the sale of a business that was in administration. The buyer paid a non-refundable deposit of 10% of the value of the leasehold property and 50% of the value of equipment and other assets. It was then allowed into occupation to commence trading. The completion date passed and the buyer paid a further non-redundable deposit in the sum of £500,000 to keep the deal alive – but went into administration itself without ever having completed the transaction. The buyer argued that the sums paid constituted an unlawful penalty. Alternatively, it sought relief from forfeiture in equity or an order for the return of the deposit under s49(2) of the Law of Property Act 1925. The judge was unable to assist. He ruled that a buyer in default is not entitled to a lien over the deposit paid (or any other part-payments). In addition, the parties had agreed that any claims by the buyer would rank after the claims of the seller’s secured creditors. Consequently, the buyer’s claim was almost certainly worthless, even if it were to obtain an order for the return of all or any part of the deposit.  Practitioners will be interested in the judge’s analysis of the difference between contractual provisions that require buyers to pay money or transfer property following a breach of contract and provisions that enable sellers to forfeit money that has already been paid. The judge took the view that the rule against penalties (which applies to sums that do not represent a genuine pre-estimate of the loss likely to flow from a breach of contract) does not apply to money that has already been paid to a seller. This would place a deposit in a different category to that of a penalty. However, the court has an equitable jurisdiction to relieve a buyer from the forfeiture of its deposit, if and to the extent that it would be unconscionable to allow the forfeiture to take effect.  It also enjoys the statutory jurisdiction conferred by s49(2).  Unfortunately, the court was unable to consider this further because there was insufficient evidence of the loss caused by the buyer to determine whether the forfeiture was unconscionable or not. Buyers and sellers will be particularly interested in the judge’s views on the amount of the deposit. He did not decide the point, but expressed the opinion that the sum paid was reasonable in this case, even though it represented considerably more than 10% of the purchase price.  The administrator ran the risk of incurring substantial losses if the buyer failed to complete, especially in circumstances where there was an alternative buyer who had the funds available to exchange and complete simultaneously. Allyson Colby, property law consultant