26 April 2017

Deposits – refund or retain?

It is very common for a deposit to be paid to secure a horse before the purchase proceeds. Often, the terms on which that deposit is to be held are not discussed, though it is understood that the seller will withdraw the horse from the market until the prospective buyer is ready to go ahead.

If the sale does not in fact go ahead, there is often a dispute about whether or not the deposit has to be returned.  The seller will claim that the deposit is theirs as it protected them against the risk the buyer would walk away, potentially leaving them out of pocket. The buyer will claim that it should be repaid in full. Who is right?

The starting point is to examine the terms of the contract: what did the parties actually agree that this payment would represent?

The common law provides that there are two classes into which a deposit might fall, either:

  • A ‘true’ deposit in law; or
  • A part-payment in advance, which is not treated as a ‘true’ deposit.

In both cases, if the sale proceeds the payment is offset against the purchase price.

A ‘true’ deposit

A ‘true’ deposit is a partial payment of the purchase price which also amounts to a promise made by the prospective buyer that they will perform the terms of the contract. If the buyer does not proceed, that may amount to a breach of contract and the buyer will forfeit the deposit which the seller can then keep.

However:

  • The buyer may be able to recover the sum paid by claiming what is known as ‘relief from forfeiture’. A court has discretion to award relief in limited circumstances, in essence where it would be very unfair not to do so. The law here is quite complex, but the buyer is more likely to get their money back if the seller has not suffered any financial loss.
  • If the parties agreed that the buyer would buy the horse only if it passed a vetting, this is what is known as a ‘condition precedent’ – a condition which has to be fulfilled before the contract becomes binding. If the horse fails the vetting, the contract falls away and the seller should return the deposit.

What is a part-payment?  

A part-payment in advance, which is not a ‘true’ deposit, cannot automatically be withheld by the seller if the buyer does not proceed.  It does not guarantee that the buyer will go ahead.

Agreeing the treatment of deposits   

Very often, the parties do not think about the status of the deposit. In the absence of agreement, what was said and done then has to be examined to find out whether the parties intended that the deposit would be withheld or returned.

It is far easier to avoid the problem in the first place by insisting that a written receipt is issued which clearly sets out the status of the payment and the circumstances in which it is agreed that the deposit will either be repaid or withheld.  Parties can agree what they wish here, and having something in writing can save a great deal of argument later.

The amounts in question are often relatively modest and both seller and buyer need to bear carefully in mind the cost/benefit of formal action.  We usually see disputes of this nature settle by way of a compromise, where the seller returns what has been paid perhaps after certain out of pocket expenses are deducted.

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About the Author
Alison Goodwin, Partner
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Alison Goodwin is a Hereford solicitor, specialising in equine.

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