The Court of Appeal has recently provided welcome guidance on the circumstances in which a court will exercise its discretion to order the return of a buyer’s deposit after it fails to complete a land purchase.
Facts
In Midill (97PL) Ltd v Park Lane Estates Ltd and Gomba International Investments Ltd [2008], the buyer, Midill (97PL) Ltd, agreed to purchase from the seller, Gomba International Investments Ltd, all of the shares in Park Lane Estates Ltd (PLE) for £4m. PLE’s only asset was a commercial property on Park Lane in London. Midill paid a 10% deposit (£400,000) on exchange of contracts. Midill then failed to comply with a notice to complete and the seller purported to rescind the contract and retain the 10% deposit. Several months later, the seller sold the property to a third party for £4.3m.
Midill sought to recover its deposit under s49(2) of the Law of Property Act 1925 on the basis that the seller had made a profit on the subsequent sale. Section 49(2) provides:
‘Where the court refuses to grant specific performance of a contract, or in any action for the return of the deposit, the court may, if it thinks fit, order the repayment of any deposit.’
Under s49(3), this discretion only applies to a contract for the sale or exchange of any interest in land. The seller accepted that s49(2) applied to the contract (as PLE’s only asset was the Park Lane property), but nevertheless refused to return the deposit.
High Court decision
His Honour Judge Mackie QC refused to exercise this discretion in favour of Midill. He held that something exceptional would be required to justify ordering the return of the deposit and that the fact that the seller had made a profit on the subsequent sale was not enough. He went on to say that, if the liability to repay the deposit depended on some future sale price, there would be considerable uncertainty, possibly for a lengthy period of time. HHJ Mackie QC also noted that Midill was a sophisticated party that was well aware of the risks of failing to complete the purchase.
Midill appealed on the basis that the judge had erred in taking too narrow a view of the section 49(2) discretion, which was wide and should be exercised to achieve the fairest course between the parties.
Court of Appeal decision
After undertaking a detailed review of the authorities, the Court of Appeal concluded that the High Court decision was ‘impeccable’ and dismissed the appeal.
In the only reasoned judgment, Carnwath LJ stated that the critical point was that the deposit is a guarantee for the performance of the contract, which could be retained by the seller if the buyer defaults without any regard to the question of actual loss or its amount. That principle is not overridden by s49(2), but rather there needs to be something special or exceptional to justify overruling the ordinary contractual expectations of the parties.
Carnwath LJ saw nothing to suggest that the price rise was exceptional in relation to movements in the market generally. He also saw no obvious reason why Midill should have the benefit of any such price rise, particularly given that the seller had borne the risk and cost of holding the property during the intervening period.
Implications
The Court of Appeal decision leaves open the issue of what circumstances will be considered exceptional enough for a deposit to be returned. The contract in question was entered into in December 2005, before the onset of the present economic downturn. The current climate poses the question of whether a buyer who is now unable to complete because, for instance, the necessary funding is withdrawn after contracts have been exchanged, should be entitled to a return of the deposit. In light of the Court of Appeal’s decision, it would appear that, although the door has not been completely closed on such a claim, the hurdle that any aggrieved buyer would have to overcome to succeed is a high one.
