Non-refundable deposit / Rouwkoop

BUYERS / SELLERS / AGENTS – TAKE NOTE OF THESE CLAUSES AND THEIR MEANING:

When buying, selling or being the agent to any agreement of sale for immovable property – take special notice of these clauses and their meaning. Normally whenever a contract are cancelled they form the basis for the aggrieved parties claims and therefore if incorrect or understood incorrect their might be a much lessor claim or no claim at all for the aggrieved party. For example – the word ‘nonrefundable’ is not a 100% non-refundable as you might think. It is therefore very important to understand what the clauses mean and the rights you have in terms of these clauses.

We will look at the some of the definitions or meanings of the clauses mentioned.

Non-refundable deposit or Forfeiture clause: Estate Agents should be very careful not to create an expectation with a Seller that he/she will be entitled to all of non-refundable deposit or monies already paid to the Conveyancers on account of the purchase price if a purchaser breaches a Deed of Sale of Immovable Property and such breach results in a cancellation thereof (non-refundable = dangerous clause). It is common practice that a purchaser will state that the deposit will be non-refundable in an effort to persuade seller to accept his offer, just for the seller to find out, after cancellation of the contract (due to breach), that not all amounts may be retained as liquidated damages or as non-refundable deposit.

In terms of the Conventional Penalties Act (Act 15 of 1962) (The “Act”) any penalty or liquidated damages (a non-refundable deposit will be a penalty) contained in a contractual obligation shall be subject to the provisions of the Act. It specifically states in section 3 that:

“If upon the hearing of a claim for a penalty, it appears to a court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extent as it may consider equitable under the circumstances: Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor’s proprietary interest, but any other rightful interest that may be effected by the act or omission in question.”

A forfeiture stipulation resulting from the withdrawal from an agreement is also covered by the stipulations of the Act quoted above, meaning that it applies to non-refundable deposits as well as the retention of certain amounts already paid by a Purchaser as liquidated damages.

Sellers must note, that although a deed of sale may state, “non-refundable deposit or liquidated damages is agreed, the Penalties Act override this and therefore the Seller’s damages will often only be liquidated once the property is resold (only then can it be calculated what was the actual damages suffered in relation to price – there might be other damages). The Purchaser therefore runs the risk (failing a subsequent agreement being reached or a court ordering otherwise) of the Conveyancer holding the monies back until the property is resold. Therefore it could in certain instances be better for all parties (also taking legal cost and time in consideration) to rather agree on an amount of damages and settle.

Rouwkoop: A rouwkoop clause comes from our common law. The word is derived from the Dutch words meaning “regret” and “purchase”. In essence, it is a clause in an agreement that entitles a party to that agreement to pay an agreed sum of money in order to be allowed to withdraw (or purchase his/her freedom) from the agreement.

The amount of rouwkoop must be determined or determinable at signing agreement of sale. If a purchaser in an agreement containing a rouwkoop clause withdraws from the agreement and pays the agreed rouwkoop amount, the purchaser will be acting in accordance with the terms of the agreement and his/her withdrawal will not amount to a breach of the agreement (note: so none of the breach clause penalties will be applicable as there is not a breach, even though their might be other damages to that the seller suffer due to the rouwkoop clause being enforced).

Option to Purchase (rather than non-refundable deposit): In the light of the above and more specific the Conventional Penalties Act it would be better if you wishes to include a provision in terms of which certain monies will be non-refundable, to grant the Purchaser an option to purchase the property on the basis that the Purchaser pays an amount to have the right to such option (so the payment is not a deposit). The option agreement will provide that if the option is exercised, the option amount will then be deducted from the Purchase Price if the transfer takes place. If the option is not exercised and the transfer of property does not take place then the option monies will remain the property of the Seller and this will not be considered a penalty or forfeiture stipulation.

It is also important to note the difference between AN OPTION and A RIGHT OF FIRST REFUSAL:

Simply put: an option consists of an offer by the grantor to sell a property to the grantee on specified terms and conditions, coupled with an undertaking not to withdraw such offer within a specified period (also not to sell to anyone else). Therefore, an option must satisfy the legal requirements for a valid contract/ deed of sale and parties agree upfront as to price and way of payment and upon the timely exercise of the option, a valid and binding contract is constituted.

In contrast to an option agreement, the right of first refusal does not compel the owner (grantor/seller) to sell, but compels him to give the potential purchaser (grantee) preference if and when the owner decides to sell during the existence of the right of first refusal. This implies that the grantor must provide the grantee an opportunity of purchasing the property or turning down the invitation.                           

Note also the following important difference: The owner that grants a right of first refusal is not restricted from marketing his property as in the instance of an option agreement.

Breach of contract: A breach of contract occurs, generally, when a party to the contract, without lawful excuse, fails to honor his obligations under the contract.

The point of departure when cancelling a contract is to determine what the terms of the contract are: if the contract has a cancellation clause, then the innocent party will be able to cancel the contract in the event of a breach of contract. (When cancelling the contract the innocent party must take care not to cancel the contract incorrectly -referring to: time allowed to rectify breach and how this notice is given to other party).When the contract is cancelled in terms of the breach clause 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 (Act 15 of 1962) (The “Act”) will be applicable to the amount of damages that may be claimed.

It is also important to note that Conveyancers/ attorneys are expected not to act as judge and jury when dealing with monies in their trust accounts when a dispute arises about who should be the rightful recipient of such monies once the Deed of Sale is cancelled. The Conveyancers cannot be expected to pay the monies to either party in the absence of an agreement being reached between the parties or a competent court making an order.

As you can see from the above it is always advisable to seek expert legal advice before entering into any agreement of sale for immovable property to make sure that you are protected in terms of the deed of sale and that you know what you as aggrieved party are entitled to when a deed of sale is cancelled.

Written by FRANCOIS KRUGER an attorney specializing in Property Law, practicing for his own account under Francois Kruger Attorneys, Tyger Valley 0219149022