Sydney Developments Pty Limited v Perry Properties Pty Limited

This case concerns a contract for the sale of certain properties in Ashfield. The parties entered into the contract on 2 September 2015, with the plaintiff as purchaser and the defendant as vendor. The purchase price under the contract was $4,658,888. The completion date was stated to be the 274th day after 2 September 2015 (that is, 1 June 2016).

Both parties claim that the contract has been terminated.

The defendant vendor asserts that it terminated the contract on 6 January 2016 pursuant to Special Condition 25 of the contract following the failure of the purchaser to pay the “additional deposit” required by that condition. Special Condition 25 is of central importance to the case. It provides:

The plaintiff purchaser contends that Special Condition 25 is a penalty, and thus unenforceable. The purchaser therefore claims that it was not open to the vendor to terminate the contract under Special Condition 25, and that by doing so the vendor repudiated the contract. The purchaser asserts that it terminated the contract on 16 February 2016 when it accepted the vendor’s repudiation.

The purchaser had earlier lodged a caveat over the properties, claiming an interest as the purchaser under a contract for sale. On about 22 February 2016 the vendor served a lapsing notice in respect of the caveat. The purchaser commenced these proceedings by a Summons filed on 3 March 2016. On the first return date, an order was made by consent extending the operation of the caveat until further order. The matter was set down for hearing on 6 April 2016.

At the hearing, the purchaser pursued various claims for relief. Damages was sought in respect of the vendor’s alleged repudiation of the contract, and relief was sought in respect of the $465,888.80 paid by the purchaser as a deposit on exchange of contracts. This amount (plus interest) was claimed on the basis that the consideration for the payment had totally failed, and alternatively pursuant to s 55(2A) of the Conveyancing Act 1919 (NSW) or equitable principles of relief against forfeiture. Some of those claims for relief were not included in the Summons. However, leave was granted to the purchaser to file an Amended Summons which included all claims for relief. It was agreed that if the question of damages arose, it would be dealt with at a subsequent hearing.

The vendor did not file any Cross-Summons. The vendor does not seek relief against the purchaser, although it maintains that it has the right to keep the $465,888.80 paid by the purchaser, and that the caveat should be removed if the purchaser were to fail in its claims.

Evidence was adduced concerning events leading up to the exchange of contracts. Much of that evidence was of little or no relevance to the issues to be decided. I note, however, that the respective parties had solicitors acting for them (Ming Yang & Co. for the purchaser; NC Coombes & Co. for the vendor) and that various provisions of the contract were the subject of negotiation between the solicitors.

The contract for sale employed the 2005 edition of the Law Society/Real Estate Institute standard form. The front page of the contract provided for a price of $4,658,888, and a deposit of $465,888.80. The words “10% of the price unless otherwise stated” appear in parentheses adjacent to that figure.

The deposit is dealt with in clause 2. Clause 2.1 provides that the purchaser must pay the deposit to the depositholder as statekeholder. The depositholder is the vendor’s agent named on the first page of the contract. Relevantly, clause 2 further provides:

The deposit is further dealt with in Special Conditions 9 and 25. Special Condition 25 is set out above at [3]. Special Condition 9 is in the following terms:

As noted earlier, the 10% deposit of $465,888.80 was paid by the purchaser upon the exchange of contracts. By virtue of Special Condition 9, that money was released to the vendor.

On 28 October 2015 the solicitors for the vendor wrote to the solicitors for the purchaser to confirm that Special Condition 25 required payment of an additional deposit of $465,888.80 by 2 January 2016 (being the date 122 days from the date of the contract). Bank account details were provided for that purpose.

On 16 December 2015 the purchaser’s solicitor sent an email to the vendor’s solicitor in which it was stated that the purchaser had a temporary problem with funding, and a request was made for an extension of one month for the making of the second instalment payment. That request was refused. The vendor’s solicitor stated that the vendor required the purchaser to comply with the contract.

On 22 December 2015 a different firm of solicitors for the purchaser sent a letter to the vendor’s solicitor requesting an extension of the time for payment to 31 January 2016. The letter noted that the purchaser had expended significant time and effort to improve the property by preparing development applications.

On 23 December 2015 the purchaser’s solicitor sent an email to the vendor’s solicitor stating that (subject to confirmation from a funder) $50,000 could be paid by 31 December 2015, 40% of the deposit by 15 January 2016, and the balance before 1 February 2016. The vendor’s solicitor responded by confirming that payment was required in accordance with the contract. The purchaser’s solicitor then sent a further email stating that instructions would be sought to seek relief against forfeiture if the contract was terminated by the vendor, given that the purchaser had substantially improved the property “from the DA documentation (which our client owns)”. Once again, the vendor’s solicitor responded by stating that payment was required pursuant to the contract. It was stated that this was required “to meet financial commitments by our client entered into reliant upon your client complying with its obligations under the contract.”

On 25 December 2015 the purchaser’s solicitor sent a letter to the vendor’s solicitor which contained a proposal that Special Condition 25 be amended so as to allow the additional deposit to be paid in three instalments over the period 5 January 2016 to 1 February 2016. A cheque for the first instalment of $50,000 was enclosed, payable to the vendor’s solicitors. The letter stated that “receipt or deposit of this cheque is regarded as acceptance of the amendment requested.” The purchaser’s solicitor sent an almost identical letter on 1 January 2016 under cover of an email in which it was suggested that a meeting take place between the solicitors.

The vendor’s solicitor responded on 2 January 2016 stating that the contents of his emails of 23 December 2015 were re-affirmed, that the cheque was to be returned, and that the vendor did not agree to the amendment of the contract.

On 6 January 2016 the vendor’s solicitor served a Notice of Termination upon the purchaser’s solicitor. The notice was addressed to the purchaser and its solicitor and relevantly provided:

The notice was signed by Mr Perry as sole director and secretary of the vendor.

On 7 January 2016 the purchaser’s solicitor sent a letter by facsimile to the vendor’s solicitor denying the validity of the Notice of Termination. The grounds of invalidity did not include any assertion that Special Condition 25 was a penalty. Later on 7 January 2016 the purchaser’s solicitor sent an email to the vendor’s solicitor stating that the purchaser still wished to proceed under the contract and would deliver a cheque for the balance of the 10% deposit on 1 February 2016.

On 8 January 2016 the vendor’s solicitor replied to the 7 January 2016 letter. He stated that his instructions were, inter alia, that the Notice of Termination was valid and enforceable and that Special Condition 25 was an essential term of the contract. Issue was taken generally with the matters asserted in the 7 January 2016 letter. It was further stated that the cheque that had been delivered would be returned by post. Finally, it was stated that the property would be listed for sale in the following week with an asking price of $5 million. Evidence was adduced that the vendor has on at least two later occasions expressed a willingness to sell the property to the purchaser for $5 million.

The purchaser retained its current solicitors in about early February 2016. The caveat was lodged on 3 February 2016. On 16 February 2016 the purchaser’s solicitor sent a letter to the vendor’s solicitor in which it was asserted that Special Condition 25(b) was a penalty at law and unenforceable. It was suggested that it was a penalty because the sum stipulated “is extravagant and unconscionable in respect of the bargain between the parties, the Purchaser having already advanced the defined Deposit at exchange” and “has no connection to any damage or loss incurred by the Vendor”. It was stated that the vendor, by asserting a breach of an essential term and by issuing the Notice of Termination, had repudiated the contract. It was further stated that the purchaser accepted the repudiation. A Notice of Termination was enclosed with the letter.

On 17 February 2016 the vendor’s solicitor replied to the letter of 16 February 2016. The validity of the vendor’s termination of the contract was maintained. It was also stated that the deposit paid by the purchaser had been forfeited. As noted earlier, a lapsing notice in respect of the caveat was served on about 22 February 2016, and the proceedings were commenced by the purchaser shortly thereafter.

The first issue to determine is whether Special Condition 25 should be characterised as a penalty.

It was submitted on behalf of the purchaser that Special Condition 25 was penal because it called for a deposit in an extravagant or unreasonable amount, namely 20% of the purchase price, whereas the usual amount of a deposit under a contract for the sale of land in New South Wales is 10% of the purchase price (see Luu v Sovereign Developments Pty Limited [2006] NSWCA 40 at [24] – [25]). Reference was made to the decision of the Judicial Committee of the Privy Council (on appeal from the Court of Appeal of Jamaica) in Workers Trust and Merchant Bank Limited v Dojap Investments Limited [1993] AC 573 which dealt with the question whether a deposit in excess of 10% paid under a contract for sale of land can be lawfully forfeited by the vendor if the purchaser fails to complete on the due date. In that case, the property was sold at auction pursuant to a contract which provided for payment of a deposit of 25% of the purchase price, with the remainder of the purchase money payable within 14 days of the auction. The contract further provided that the deposit was forfeited if the vendor terminated the contract consequent upon breach by the purchaser. Lord Browne-Wilkinson, who delivered the judgment, stated at 578-579:

Lord Browne-Wilkinson continued at 580:

At 582 Lord Browne-Wilkinson stated:

I note in passing that Workers Trust Bank Limited v Dojap Limited (supra) was cited with apparent approval by Santow JA (with whom Tobias JA and Brownie AJA agreed) in Havyn Pty Limited v Webster [2005] NSWCA 182 at [132] and [134], and later by the High Court in Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22; (2008) 236 CLR 342 at [25]-[26] (see also the decision of Smart AJ in Manufacturers House Pty Limited v Ashington No 147 Pty Limited [2005] NSWSC 767 at [47] – [61]).

Reference was also made to the High Court’s observations regarding penalties in Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30; (2012) 247 CLR 205 at [10] that:

It was submitted on behalf of the vendor that Special Condition 25 was not a stipulation that was collateral to a primary stipulation in the sense described in Andrews v Australia and New Zealand Banking Group Limited (supra) at [10]. It was put that the Special Condition was not held in terrorem over the head of the purchaser to secure compliance with another provision of the contract. Rather, it was itself an essential term of the contract which, in the event of its breach by the purchaser, enabled the vendor to terminate the contract and forfeit 10% of the purchase price.

It was further submitted on behalf of the vendor that it is accepted, in the context of agreements for the sale of land, that a deposit of 10% is not excessive and that the forfeiture of a deposit for such amount is not regarded as penal. Reference was made to Luu v Sovereign Developments Pty Limited (supra) at [24] where Bryson JA (with whom Handley and McColl JJA agreed) stated:

The vendor sought to characterise the second payment required by Special Condition 25 as in the nature of an instalment of the price rather than as part of the deposit. Alternatively, it was put that in circumstances where the second payment was not due for four months and completion was not due for nine months, the second amount the subject of Special Condition 25 could be seen as an amount paid in earnest of performance (see Brien v Dwyer (1978) 141 CLR 378 at 385-6, 398 and 406). It was submitted that in any event Workers Trust Bank Limited v Dojap Limited (supra) was consistent with the notion that there is no penalty if the forfeitable deposit amounts to no more than 10% of the purchase price.

The correct approach to the task of assessing whether a contractual provision is penal was recently described by Allsop CJ (with whom Besanko and Middleton JJ agreed) in Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50 at [95]-[96] as follows:

In the present case the provision alleged to be a penalty, Special Condition 25, forms part of a contract for the sale of land. The condition is primarily concerned with obligations upon the purchaser to make two payments, each equal to 10% of the purchase price. The first payment is described as a deposit. It is payable on the date of the contract. The second payment is described as an additional deposit. It is payable no later than 122 days from the date of the contract. Time is stated to be of the essence in this regard. The terms of the condition are expressed to be essential terms of the contract. It is further expressed that if the terms of the condition are not complied with, the vendor may terminate the contract and the purchaser shall forfeit “the deposit paid on the date of this contract”. (See also clause 9 of the contract which provides, relevantly, that if the purchaser does not comply with the contract in an essential respect the vendor can terminate the contract and keep or recover the deposit to a maximum of 10% of the price.)

It was suggested on behalf of the purchaser that Special Condition 25 should be seen as collateral to the primary stipulation that the purchaser pay the balance of the purchase price on completion, and that the required payments (which totalled 20% of the purchase price) are in the nature of a security for, or in terrorem of, satisfaction of that primary stipulation. It is difficult to regard Special Condition 25 in that way, given that the payments that are the subject of the condition are required to be paid whether or not the contract proceeds to completion. Special Condition 25 imposes no additional detriment upon the purchaser merely because completion does not occur. Nevertheless, if the contract is terminated due to a failure of the purchaser to comply with its essential obligations under Special Condition 25, the condition operates (in its own terms or in conjunction with clause 9) so that the purchaser forfeits its interest under the contract and the deposit paid on the date of the contract. In that way, Special Condition 25 incorporates a financial incentive for the purchaser to perform its obligations under the condition and to that extent is capable of being regarded as penal in nature.

Since Legione v Hateley (1983) 152 CLR 406, it has been accepted in Australia that equity might in certain circumstances give a purchaser, who has failed to comply with an essential obligation under a contract for the sale of land, relief against forfeiture of its interest in the land. Such relief is not sought in this case.

However, it has long been established that the principles concerning penalties and forfeitures do not apply to stipulations in contracts for the sale of land that provide for forfeiture of reasonable deposits. That is the case even though the amount bears no reference to the actual loss that might flow from the breach that gives rise to the forfeiture. This exception applies only in respect of payments that truly have the character of a deposit, and only to the extent that such payments are reasonable, not excessive, in amount (see Havyn Pty Ltd v Webster (supra) at [134]-[137]; Luu v Sovereign Developments Pty Limited (supra) at [25]; Iannello v Sharpe (supra) at [31]; Workers Trust and Merchant Bank Limited v Dojap Investments Limited (supra) at 578-579, cited with approval by the High Court in Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22; (2008) 236 CLR 342 at [25]-[26]; see also Andrews v Australia and New Zealand Banking Group Limited (supra) at [43]). Advantage cannot be taken of this exception merely because the parties to the contract have labelled or designated a payment as a deposit.

In the present case, the parties have designated two payments of 10% of the purchase price as deposits (“a deposit” and “an additional deposit”) which together form a deposit totalling 20% of the purchase price (“whereby the deposit paid shall then be 20% of the purchase price”). The purchaser thus contends that the contract provides for a deposit in an amount equal to 20% of the purchase price.

As noted, the label used by the parties is not determinative. Nonetheless, the language of the Special Condition (which is stated to operate notwithstanding anything else in the contract) is indicative of an intention that both payments are in the nature of a deposit.

The nature of a deposit has been variously described (see, for example, Brien v Dwyer (supra) at 385-6, 392, 398, 401 and 406). As pointed out by the High Court in Commissioner of Taxation v Reliance Carpet Co Pty Limited (supra) at [22], a deposit in the conveyancing context has several aspects, including that a deposit is provided as an earnest to bind the bargain, and is provided as a form of security for the performance by the purchaser of its obligations under the contract (see Commissioner of Taxation v Reliance Carpet Co Pty Limited (supra) at [25]-[26]).

The first payment is plainly in the nature of a deposit. The position is less clear in relation to the second payment. It is not payable until about four months after exchange of contracts. That is still some five months prior to the contractual completion date, so the second payment is capable of being characterised as a payment made as an earnest of performance (compare Rana v Dalla Costa [2014] NSWSC 1113 at [63]). The second payment cannot, however, be characterised as a form of security for the performance of the purchaser’s obligations, because the amount of the second payment is not forfeited in the event that the contract is terminated consequent upon breach by the purchaser. It is not necessary to decide whether the second payment is itself in the nature of a deposit, or something else such as an instalment of the purchase price. The task at hand involves an assessment of Special Condition 25 as a whole in order to determine whether it is penal.

In my opinion, Special Condition 25 should not be characterised as a penalty. It provides for termination of the contract if the purchaser does not comply with the essential terms of the condition, in which case the purchaser forfeits the first payment of 10% of the purchase price. Regardless of whether that first payment is considered to be the only true deposit paid, or is considered to be part of a deposit amounting to 20% of the purchase price, only 10% of the purchase price may be forfeited.

Special Condition 25 can be distinguished from the provision that was the subject of Workers Trust and Merchant Bank Limited v Dojap Investments Limited (supra). In that case the contract required payment of a deposit of 25% of the purchase price, and the entirety of the deposit was forfeited upon the purchaser’s failure to complete. The deposit consisted of “one globular sum”. The Privy Council stated (at 580) the principle that if a vendor seeks to obtain an amount greater than 10% of the purchase price “by way of forfeitable deposit”, it must show special circumstances which justify such a deposit. That question does not arise in the present case where the “forfeitable deposit” does not exceed 10% of the purchase price. The Privy Council was not satisfied that a forfeitable deposit of 25% of the purchase price was justified (see at 581). It was held (at 582) that the provision for its forfeiture was a penalty.

Here, the element of forfeiture applies only to the first payment, in an amount that has traditionally been regarded as reasonable. No penalty is involved in the forfeiture of such an amount under a contract for the sale of land, even though the amount bears no reference to the actual loss that might flow from the breach that gives rise to the forfeiture.

It follows from the conclusion that Special Condition 25 is not a penalty, that the vendor was entitled, upon the failure of the purchaser to comply with its essential obligations, to invoke the condition to terminate the contract and forfeit the 10% of the purchase price which had been paid on exchange of contracts.

The Notice of Termination issued by the vendor on 6 January 2016 was effective to terminate further performance of the contract. In accordance with the terms of the contract (Special Condition 25 and clause 9.1) the vendor became entitled to keep the 10% of the purchase price which was paid on exchange of contracts. There was no repudiation of the contract by the vendor. The purchaser is thus not entitled to damages as claimed. Neither is it entitled to restitution of the $465,888.80 on the grounds of a total failure of consideration (compare Foran v Wight [1989] HCA 51; (1989) 168 CLR 385 at 432, 438, 455 and 459).

I turn now to consider the purchaser’s alternative arguments for the repayment of the money paid.

These arguments were based upon s 55(2A) of the Conveyancing Act, and also equitable principles of relief against forfeiture. Section 55(2A) provides:

As explained by Santow JA in Havyn Pty Limited v Webster (supra) at [137], s 55(2A) created a jurisdiction to relieve against forfeiture of a reasonable deposit that was hitherto unknown to courts of equity (see also Luu v Sovereign Developments Pty Limited (supra) at [24]). If relief is available to the purchaser it will be pursuant to the statute, not general equitable principles.

In Lucas & Tait (Investments) Pty Limited v Victoria Securities Limited [1973] 2 NSWLR 268, Street CJ in Eq stated at 272:

It is not necessary to demonstrate special or exceptional circumstances in order to justify an exercise of the discretion under s 55(2A) (see Harkins v Butcher [2002] NSWCA 237; (2002) 55 NSWLR 558 at [77]; Havyn Pty Limited v Webster (supra) at [149]). However, a proper approach to the discretion must appreciate the legal context of the established nature of a deposit as an earnest of performance in conveyancing transactions (see Havyn Pty Limited v Webster (supra) at [150]-[151]).

As Santow JA stated in Havyn Pty Limited v Webster (supra) at [155]:

The purchaser submitted that in all the circumstances it would be unjust and inequitable to permit the vendor to retain the deposit that was paid on exchange. It was submitted that the vendor acted harshly and unfairly in rejecting the purchaser’s requests for an extension of the time by which the second payment had to be made, and in refusing to agree to an amendment of Special Condition 25. It was also submitted that retention of the money would give the vendor an unwarranted windfall, particularly as it appeared that the value of the properties may have increased (as indicated by the vendor’s statements about selling for $5 million). It was also pointed out that the purchaser had spent considerable sums of money in preparing development applications for the properties.

I do not think that it would be unjust or inequitable to permit the vendor to retain the deposit that was paid on exchange. The vendor certainly took a hard line in the face of the purchaser’s requests for more time. However, it was merely insisting upon performance of an obligation that the parties had agreed was essential. The contract has been entered into by two corporations for the sale of substantial property at a price of more than $4.65 million; the contract had been negotiated by solicitors retained by the parties. It may be the case (although there is no valuation evidence before the Court) that the properties have increased in value since the date of the contract, but it is by no means clear that the vendor will actually secure such a gain if the properties are re-sold. The purchaser may also have spent money in the preparation of development applications, but it was under no contractual obligation to do so, and there is no suggestion that the vendor is entitled to the benefit of such expenditure.

In all the circumstances, and taking into account the nature of the payment as an earnest of performance and the important role that such payments play in transactions of this kind, I decline to exercise the discretion under s 55(2A) to order repayment of the $465,888.80.

It follows from the above that the Amended Summons should be dismissed. The plaintiff should pay the defendant’s costs of the proceedings. In addition, the caveat lodged by the plaintiff should be withdrawn.

The Court orders: