1. Non-refundable or forfeiture clause
Sellers are sometimes sold on the idea of including a non-refundable deposit clause in the Contract of Sale. More often than not, sellers are under the impression that they will be entitled to all of the non-refundable deposit or monies already paid to the conveyancer on account of the purchase price if the purchaser breaches a Deed of Sale and such breach results in the cancellation thereof.
The seller will, however, then find out that after cancellation of the contract due to breach, that not all amounts may be retained as liquidated damages or as a non-refundable deposit.
In terms of our case law, Matthews v Pretorius (1984) (3) (SA547W) and the Conventional Penalties Act 15 of 1962 (“the Act”), any penalty or liquidated damages contained in a contractual obligation shall be subject to the provisions of the Act which affords the Court the discretion to, on hearing a claim for a penalty or a non-refundable deposit, find that it might be out of proportion to the prejudice suffered by the creditor and the Court may reduce the penalty to such extent as it may consider equitable under the circumstances, taking in due consideration the interests of all concerned.
This means that any forfeiture stipulation resulting from the cancellation of an agreement, including non-refundable deposits, as well as the retention of certain monies already paid by a purchaser as liquidated damages, will be subject to the measurement as described in the Conventional Penalties Act.
Estate agents should be very careful not to create an expectation with the seller that he or she will be entitled to all of the non-refundable deposit or monies already paid to the conveyancer on account of the purchase price if a purchaser breaches a Deed of Sale of immovable property and such breach results in the cancellation thereof.
The role of conveyancers is important to understand as well. It is not expected from conveyancers to act as a Judge and Jury when dealing with monies in their trust account when a dispute arises about who should be the rightful recipient of such monies once the Deed of Sale is cancelled. Unless and until such time as an agreement has been reached between the parties or a competent Court has made an order, it cannot be expected of conveyancers to pay the monies to either party.
2. Breach of Contract
The relationship between a purchaser and seller is governed by the Contract of Sale. The breach of contract occurs generally when a party to a contract without lawful excuse fails to honour his or her obligations under the contract.
When a contract is cancelled in terms of the breach clause of the said contract, the aggrieved party would normally have the right to claim damages from the guilty party. When claiming damages, the aggrieved party must note that the Conventional Penalties Act will also be applicable to the amount of damages that may be claimed.
In the instance of the seller, the seller’s damages will often only be liquidated once the property is resold and the seller’s claim will only be for the deficit between the amount of resale and the original contract sum of the cancelled agreement.