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Deposits are a common mechanism in commercial transactions across various industries and contracts. However, you may have to worry about forfeiture of deposits. While you might know of a deposit in a sale of land, the concept applies equally to various other areas such as: 

The deposit tells the seller that you are serious about proceeding with the contract. Sometimes, sellers may be concerned about the financial risk of you pulling out of a sale. Thus, a deposit protects the seller and gets the deal moving. If the buyer backs out of the sale, they ‘forfeit’ their deposit to compensate for expenses and missed opportunities. This article explains the rules governing forfeiture of deposits.

Claims for Forfeiture of Deposits

There may be circumstances when a seller seeks to have a deposit forfeited. The buyer will argue that such a claim is unlawful because the forfeiture would be unfairly punitive to the buyer.

In such a case, the defaulting purchaser must satisfy a court that keeping the deposit compensates them for the loss. This would be on the basis that the amount to be forfeited is not a genuine pre-estimate of the loss. Unfortunately, disputes about whether or not it is fair for a seller to keep a deposit will be decided by a court. 

Just using the word ‘deposit’, or phrases such as ‘genuine pre-estimate’ or ‘fair and reasonable’ is not enough. The parties’ relative bargaining positions, among other factors, is key in deciding whether a deposit amount is fair and reasonable. Notably, relief against forfeiture is a discretionary remedy, so the court will determine each case on its facts.

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How Can I Minimise This Problem? 

When setting a deposit, you must ensure it is fair, reasonable, and proportionate to any potential incurrable loss. However, this is not always easy to calculate as it contains a subjective element. There are common industry standards on deposit amounts. For example, the industry standard is generally 10% of the total purchase price with a business sale. Where you are paying a purchase price over a long period, there may be scope for a higher deposit that is still fair and reasonable.

The second way relates to how a seller acts in terminating the relevant agreement. A seller who stands to benefit (or at least prevent loss) from the forfeiture of a deposit should act prudently to ensure that a court will not regard them as unfairly seeking to end the contract. By terminating an agreement fairly, they are more likely to convince a court to exercise its discretion not to grant relief.

Key Takeaways

When you set a deposit amount, you should ensure it is proportionate to the potential loss you could suffer. Therefore, you can avoid the legal complexities surrounding forfeiture of deposits. If you need help with contract enforceability, our experienced commercial lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

How should the deposit be held?

Generally, the deposit money does not go into the seller’s bank accounts. Instead, many transactions require that deposit money is held by a third party, such as a lawyer, on trust. This is to prevent a seller from unreasonably holding on to a deposit. A prime example of this is with the sale of land, where the deposit is held by the real estate agent on trust until settlement occurs. 

What if the seller has made misrepresentations?

With sale of business agreements, where you are conducting due diligence, there should be a clause requiring the seller to refund the deposit if you terminate the agreement because you have discovered a misrepresentation that breaches the seller’s warranties. However, if the seller can fix any representation once you have notified them of it, you will not be able to terminate and claim back the deposit.

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