In the case of Kazacos v Shuangling International Development Pty Limited, the vendor, Kazacos, sought to recover the $850k balance of the ‘deposit’ remaining on the sale of a $17m Sydney property. The deposit was stated as $1.7m with a special condition in the contract providing that the first payment of $850k, equating to 5% of the sale price, was to be paid on exchange and the remaining 5% due on the completion date of the contract or the date when the purchaser defaulted under the contract. The purchaser failed to complete the contract and the vendor later sold the property at the higher price of $18m.
The initial 5% was found by the Supreme Court of New South Wales to hold the essential character of a deposit, in that it was “an earnest of the bargain or its performance” and therefore forfeited by the purchaser. The 5% due upon default was not related to binding the purchaser to the bargain as it would be due even when the purchaser had demonstrated it was unable to complete the contract, nor was it a genuine pre-estimate of the damages caused by the breach. This amount was found to be a penalty and not recoverable by the vendor.
A similar ruling has previously been made by the New South Wales Court of Appeal in the case of Luong Dinh Luu v Sovereign Developments Pty Ltd where the front page of the contract of sale stated the deposit payable was less than 10%, however a clause within the contract stated that the full 10% would become payable in the event of default. This was held to amount to a penalty and was therefore unenforceable.
Whilst contracts of sale for which the vendor accepts less than the standard 10% may be drafted with the intention that later payments will constitute an instalment of the initial deposit, there is a risk of similar actions arising where the contract of sale does not proceed to completion and the payment is instead viewed by the courts as a penalty.