The danger of a small deposit

It is the norm in New South Wales for a deposit of 10% to be paid on exchange of a contract for the sale of land.

It is sometimes the case – and given rising property prices, increasingly the case – that a smaller deposit of 5% is paid. When that happens the contract often requires that a balance of another 5% is to be paid on completion or when the purchaser defaults.

It has often been held that such a provision is not enforceable in the event of default and this position was recently confirmed by the New South Wales Supreme Court in Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504.

In Kazacos, the purchaser had paid half of the required 10% deposit (i.e. 5%) on exchange.  Later, the purchaser defaulted and the vendor terminated the contract and sued for the balance of the 5%.  Justice White held that the clause requiring the 5% balance of the deposit to be paid on default constituted a penalty and that the vendor could claim no more than the 5% deposit already paid.

Given in the present case, the 5% balance of the deposit was only payable in circumstances where the purchaser was in breach of the contract for having failed to complete by the completion date, Justice White held that the clause requiring the further 5% payment was void as a penalty.

The decision reinforces the risk a vendor undertakes in accepting a smaller deposit.

Please contact us for further information.

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