April 6, 2011

Buyer defaults on land purchase: will he get his deposit back?

In the case of Midill v Park Lane Estates Limited Midill contracted to purchase a commercial property on Park Lane for £4m and paid a 10% deposit of £400k. Midill then failed to complete and seller purported to rescind the contract and retain the deposit. A few months later the seller sold the property for £4.3m.

Midill sought to recover its deposit using section 49(2) of the Law of Property Act – on the basis that the seller had in fact made a profit on the subsequent re-sale. In general terms this section gives a court the discretion to order the repayment of a deposit.

Notwithstanding that the seller had re-sold the property for an amount in excess of the original contract sum, the court refused to order the return of the deposit. The court held that something exceptional would be required to merit the return of a deposit and the fact that the seller had made a profit on a re-sale was insufficient. We think there was a fair degree of policy in this judgement because, if the return of a deposit was dependent upon some future sale price, there would be unacceptable uncertainty for the seller.

So what is the relevance? The court thought that the price rise was unexceptional. Notwithstanding that this case was in a very different economic climate (as the contract in question was entered into in 2005) it still sets a precedent for current times. A buyer who, having paid a deposit and is then unable to secure the necessary bank funding to complete, is unlikely to get relief under section 49(2).

Click here for information on Holmes & Hills services providing legal advice on commercial property disputes.

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