Contracts for the Sale of Land – the hidden trap in a 5% deposit clause

The warning bells are ringing for purchasers who pay and vendors who accept 5% deposits for Contracts for the Sale of Land, as a result of a decision of the Supreme Court of New South Wales.

The decision is Alexakis v Wan [2021] NSWSC 367 (Supreme Court of New South Wales, 12 April 2021) (Darke J).

In this article we will analyse Alexakis v Wan first, and then analyse the hidden trap in a normal 5% deposit clause.

The Contract for the Sale of Land in Alexakis v Wan

The Contract was for the sale of a property in Kings Road Vaucluse from Wan to Alexakis.

The Contract price of $4,830,000 was payable ‘9 months after the contract date’.

The deposit payable was $241,500 (i.e. 5% of the price) and was payable by two instalments:

• The first instalment of $150,000 was paid on 4 April 2019, on the date of exchange of Contracts, and the Contracts were dated that day;
• The second instalment of $91,500 was payable “on the 4th month after the contract date”.

The vendor calculated that the last day for payment of the second instalment was on 4 August 2019 (i.e. 4 months after 4 April 2019). On 5 August 2019 (at 6:07pm) the vendor’s solicitor sent an email to the purchaser’s solicitors:

We have been instructed to advise that the vendor has elected to terminate the contract dated 4 April 2019 for the sale of property at 48 Kings Road Vaucluse because of the purchaser’s failure to pay the balance of the deposit of $91,500.00 in accordance with clauses 2 and 38 of the contract.

Clause 2.2 of the Contract stated: “Normally, the purchaser must pay the deposit on the making of this contract, and this time is essential.”

Clause 2.3 of the Contract stated: “If this contract requires the purchaser to pay the deposit at a later time, that time is also essential.”

(note: clauses 2.2 and 2.3 are in the standard Law Society / Real Estate Institute contract)

Clause 38 was Additional Condition 38, which stated that the second instalment was payable “on the 4th month after the contract date”.

The purchaser paid the second instalment of the deposit on 7 August 2019 into the trust account of the vendor’s agent.

The vendor’s solicitor responded by confirming that the contract had been terminated on 5 August 2019 and the deposit of $241,500 was forfeited.

The purchaser sought specific performance of the contract, arguing that the termination was not effective; sought equitable relief against forfeiture; or in the alternative, an order for the return of the deposit. The vendor sought orders for the recovery of the deposit and the removal of the purchaser’s caveat.

Was the Contract validly terminated?

To answer this question, the Court needed to consider whether payment “on the 4th month after the contract date” meant payment on 4 August 2019, or some other date.

The Court applied these definitions:

• The definition of “month” as “calendar month” under s 181(1)(d) of the Conveyancing Act 1919 (NSW).
• The definition of “calendar month” under s 21 of the Interpretation Act 1987 (NSW), that is:
  “a period commencing at the beginning of a day of one of the 12 named months and ending -
  (a) Immediately before the beginning of the corresponding day of the next named month …”

The Court said that this was the statutory expression of the “corresponding date” principle. The Court quoted with approval what Barrett J said in Re Weston Application; Employers Mutual Indemnity (Workers Compensation) Ltd v Omni Corporation Pty Ltd [2009] NSWSC 264:

“when a period is a month or a number of months “after” the event, the general rule is that the period ends on the corresponding date in the subsequent month, that is, the day of that subsequent month that bears the same number as the day of the earlier month on which the event happened”.

After considering “the language employed by the parties as well as the surrounding circumstances known to them, and the commercial purposes or objects to be secured by the contract” the Court found that the definitions applied without qualification and so the date for payment of the second instalment of the deposit was 4 August 2019.

The Court then considered whether clause 21.5 of the standard contract extended the period because 4 August was a Sunday: “If the time for something to be done or to happen is a day that is not a business day, the time is extended to the next business day, except in the case of clauses 2 and 3.2.” The Court found that clause 21.5 did not extend the time for payment of the deposit under clause 2.3 because of the specific exclusion of clause 2.

The Court found that the contract was validly terminated on 5 August 2019.

Was the purchaser entitled to equitable relief?

The Court said:

“I do not think that … it would be unconscientious of the defendants to rely upon their termination of the contract. The plaintiff failed to pay part of the deposit within the time expressed by the contract to be essential. That was a serious breach of the contract. .... To the extent that the breach was the result of a mistake on the part of the plaintiff, the defendants cannot be said to have caused or contributed to the mistake.” [judgment p 99]

Was the purchaser entitled to repayment of the deposit?

S 55(2A) of the Conveyancing Act 1919 (NSW) provides:

“In every case where the court refuses to grant specific performance of a contract, or in any proceeding for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit with or without interest thereon.”

The Court said:

“The forfeiture is the result of the plaintiff’s serious breach of the contract, which occurred without any relevant contribution on the part of the defendants. [While] The contract was on foot … the defendants were unable to freely deal with the property. Regard must also be had to the important role played by deposits in contracts for the sale of land, including as an earnest of performance by the purchaser. I do not perceive any injustice to the plaintiff or any inequity in allowing the defendants to retain the deposit [which is only 5% of the purchase price] in the circumstances of this case. No order will be made under s 55(2A) of the Conveyancing Act.” [judgment p 112]

The purchaser’s claim was dismissed and the purchaser was ordered to pay the vendor’s costs.

Analysis of the hidden trap in a 5% deposit clause

A 5% deposit clause is a clause where a part deposit of 5% of the price is paid on the Contract Date, and the balance deposit of 5% (to make up the full 10% deposit) is paid at a later date.

This is an example of a 5% deposit clause:

Notwithstanding any other provision of this contract, the vendor and purchaser agree that the deposit is 10% of the price and if the vendor agrees in writing the purchaser can pay the deposit by instalments as follows:
(a) a first instalment of 5% of the price on the contract date; and
(b) a second instalment of 5% of the price on the earlier to occur of:

(i) the date for completion; or
(ii) the date of termination by the vendor for default in or breach by the purchaser of an essential term of this contract or a notice served under this contract which makes time essential.

The hidden trap highlighted in Alexakis v Wan is in paragraph (b)(i). It is that the vendor is able to terminate the Contract on the date for completion (if the second instalment of the deposit remains unpaid) because clause 2.3 makes time of the essence on that date. This means that if completion does not take place at the end of the standard period of 42 days after the contract date, the vendor may elect to terminate the contract because that tie is of the essence.

To avoid the trap, paragraph (b)(i) should be redrafted as “the date of expiry of a notice to complete issued under this contract”. That time is an essential time.

Paragraph (b)(ii) serves to re-state clause 9.1. Clause 9.1 of the Contract provides that:

9 If the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination, the vendor can -

9.1 keep or recover the deposit (to a maximum of 10% of the price);”

There are also potential difficulties in using the word ‘termination’ in paragraph (b)(ii).

In the decision of Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd (No 2) [2017] NSWSC 866 (as in this decision), Darke J stated that the purpose of a deposit under a contract was an ‘earnest of performance by the purchaser’. It is no longer an earnest of performance if the contract is terminated.

For that reason, it is advisable for a 5% deposit clause to not refer to ‘termination by the vendor’ as an event for payment of the second instalment, but to refer instead to the ‘default or breach of an essential term by the purchaser’ or ‘the expiry of a notice by which time is of the essence’. That is, an event prior to termination. This is to guard against the argument that the second instalment constitutes a penalty and against an order for repayment of the deposit under s 55(2A) of the Conveyancing Act 1919.

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