Non-refundable deposit and forfieture clauses are seldom effective in property sale contracts

Rowan Alexander, Director of Alexander Swart Property, has drawn attention to one of many important statements on non-refundable deposit clauses, made by ESI Attorneys.  These clauses in sales documents are frequently misunderstood by those buying or selling property.

Quite often, said Alexander, sellers are advised by estate agents to include a non-refundable deposit clause in the sale contract - and are led to believe that this will entitle them to the deposit and other sums paid into the conveyancer's trust fund by the purchaser, if he breaks the sale agreement resulting in cancellation of the sale.

It has been established in SA law for some time, that any penalty or demand for liquidated damages in a property sale agreement as a result of the purchaser pulling out of a signed contract, will if taken to court, be subject to the Conventional Penalties Act.  This will ensure that out of proportion claims for disadvantages suffered by the seller, will not be granted.

Estate agents should avoid creating the expectation, that in the event of a cancellation, the seller will automatically be able to claim the deposit and other sums lodged with the conveyancer. Conveyancers on their part must make it clear at the outset, that they cannot release money in their trust account, until a signed agreement has been reached by all parties, or the court has issued an order on this subject.

For these reasons it is not advisable to make a deposit fully non-refundable in the event of a cancellation of a property sale contract.  Alexander states that South African law will protect the seller in any event, and in 90% of these cases the seller will be able to move on to another buyer without suffering great loss.   However, should the subsequent sale be significantly below the original price agreed, the person breaking the contract will usually be liable for the difference in price. What this means, is that the complainant can claim only for actual damages.

Penalty clauses of this type should not be confused with roukoop clauses; pre-agreed sums that according to law, become payable if for any reason the buyer opts out of a signed agreement.   The sums specified here are usually not as onerous as those incurred by a deliberate cancellation of the contract.