Stockley v Kimhi - [2009] SADC 136

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
STOCKLEY & ANOR v KIMHI & ANOR
[2009] SADC 136
Judgment of His Honour Judge Clayton
3 December 2009
CONVEYANCING - RELATIONSHIP OF VENDOR AND PURCHASER - BREACH OF CONTRACT - BREACH BY THE PURCHASER: REMEDIES OF VENDOR - DAMAGES
CONVEYANCING - RELATIONSHIP OF VENDOR AND PURCHASER - BREACH OF CONTRACT - DEPOSIT
PENALTY
What constitutes a penalty – deposit on sale of land.
Nature of deposit.
Defendants defaulted on contract for the sale of land in Real Estate Institute form. Contract terminated. Claim for damages including forfeiture of deposit of $30,000. Defendant claimed default provision was a penalty and therefore invalid and unenforceable.
HELD: Deposit was an earnest of the bargain or its performance and law relating to penalties does not apply. Plaintiffs claim restricted by clause 7.1.5 of the contract which is an agreed damages clause.
Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 80 ALJR 219; Luu v Sovereign Developments Pty Ltd & 2 Ors [2006] NSWCA 40; Freedom v AHR Constructions Pty Ltd [1987] 1 Qd R 59; Mehmet v Benson (1963) 81 WN (Pt 1) (NSW) 188; Brien v Dwyer [1978] HCA 50; (1978) 141 CLR 378; Boucaut Bay Company Limited (In Liquidation) v The Commonwealth (1927) 40 CLR 98, considered.

STOCKLEY & ANOR v KIMHI & ANOR
[2009] SADC 136

The plaintiffs were the owners of the property at Semaphore South. On 3 May 2008 the defendants successfully bid at auction to purchase the property.
The parties signed the Agreement in the Real Estate Institute form. The Agreement referred to the purchase price of $884,000, a deposit of $30,000 which was payable immediately and settlement was fixed for 3 July 2008 when the balance of the purchase price was payable.
The required deposit was paid to the vendors’ real estate agent but the purchasers did not complete the Agreement as required on 3 July 2008, and did not complete in accordance with a Notice to Complete which required settlement on 17 July 2008. The plaintiffs’ agent terminated the Agreement pursuant to clause 7.1.3 of the Agreement on 17 July 2008 by reason of the defendants’ failure to complete.
In this action the plaintiffs claim damages as a consequence of the defendants’ breach of contract. In the Statement of Claim the plaintiffs claim:
1.The release of the deposit monies of $30,000
2.Interest at the default rate of 11.47% on the unpaid purchase price from the Settlement Date until termination on the Agreement, amounting to $4,025.50
3.Interest with respect to the loss of use of the balance of the purchase price totalling $19,520
4.Loss of use of the deposit monies amounting to $698
5.The sum of $4,000 being the deficiency in the sale price on resale
6.The following losses and expenses totalling $12,646.29
a)    Conveyancing fees $308
b)    Council rates $413.15
c)    Reconnecting electricity $264.15
d)    -
e)    Emergency service levy $87.49
f)    Property maintenance fees $150
g)    Bank fees for attending at failed settlement $100
h)    Mortgage loan repayments of the first plaintiff from 3 July 2008 to 30 September 2008 $4623.50
i)     Mortgage loan repayments of the second plaintiff from 3 July 2008 to 30 September 2008 $6,700
7.Interest totalling $8,217.60 on bridging finance required to enable the first plaintiff to settle on the purchase of another property
8.Losses totalling $5,197.15 incurred by the second plaintiff by terminating a residential tenancy at another address
9.Losses in relation to time spent by the plaintiffs attending upon their respective banks, real estate agent, conveyancers, legal advisers and the property
The Contractual Provisions
Purchasers Default is dealt with by the following provisions in clause 7.1 of the Agreement:
7.1.1.If the purchaser breaches this Agreement and as a result, the purchase of the Property is not completed on the Settlement Date, or the Price or any part of the Price is not paid on its due date, the Purchaser must pay interest on the full Price (less the amount of any deposit monies paid) from the Settlement Date until either:-
7.1.1.1the date full payment is made; or
7.1.1.2the date of termination (whichever first occurs) at the default rate. Any payment of interest at the default rate is without prejudice to any other legal remedy the Vendor may have by reason of the Purchaser’s default.
Clause 7.1.3 contains provision for the termination of the Agreement by the vendor. There is no dispute that the Agreement was terminated in accordance with the provisions of the Agreement.
The rights of the Vendor upon termination are set out in clause 7.1.5 which provides:
7.1.5If this Agreement is terminated under the provisions of this clause 7.1:-
7.1.5.1the Deposit is forfeited to the Vendor except so much as exceeds 10% of the purchase price (which excess, if any, shall be deemed for the purposes of this Clause to be an instalment of the purchase price); and
7.1.5.2the Vendor may, at the Vendor’s option, either-
7.1.5.2aretain the Property and sue the Purchaser for damages for breach of contract; or
7.1.5.2bresell the Property either by public auction or private contract and if the Vendor re-sells the property and the re-sale is settled within 12 months following the date of termination the deficiency in price (if any) upon such resale together with all charges and expenses of and incidental to the resale or attempted resale and the Purchaser’s default must immediately after such resale be paid by the Purchaser to the Vendor as and by way of liquidated damages (the Purchaser receiving credit for any deposit paid).
Clause 7.4 provides that in the event of a dispute between the parties as to the payment of the deposit pursuant to clause 7.1.5.2 the agent may either retain the deposit monies in the agents trust account or pay the monies into court pending resolution of the dispute. A dispute is deemed to have arisen if the parties fail to respond to a notice from the agent or fail to agree in which event "the agent shall be taken to have been directed by the parties to pay the trust monies into court".
The Agreement defines "the Default Rate" to be:
…the rate of interest on the date default occurs, two percentage points above the rate charged by the Bank of South Australia Ltd. for investment loans or, if there is no such rate, then the rate of interest two percentage points above the rate of interest as charged by Adelaide Bank Ltd for investment loans
Clause 7.1.5.1 provides that upon termination of the Agreement the Deposit is forfeited to the Vendor.
The plaintiffs resold the property for $880,000. Clause 7.1.5.2b provides that the purchaser must pay the deficiency in price upon resale together with all charges and expenses of and incidental to the resale as by way of liquidated damages with the purchaser receiving credit for the deposit. Clause 7.1.5.2b is an agreed damages clause and restricts the plaintiffs claim to the amounts allowed by the clause. Many of the items of loss claimed by the plaintiffs are not included.
The defendants argue that clause 7.1.5 is a penalty clause and therefore invalid and unenforceable. They argue that the clause was not a genuine pre-estimate of the damages the plaintiffs would suffer in the event of termination of the Agreement for breach. Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 80 ALJR 219 at [10].
The plaintiffs argue that the deposit is an earnest of the bargain so that the law relating to penalties does not apply. In my opinion that argument is correct. In Luu v Sovereign Developments Pty Ltd & 2 Ors [2006] NSWCA 40 Bryson JA said:
24. Where parties make an agreement for sale which is to be completed at some time in the future it is unremarkable and only to be expected that the vendor will require the purchaser to pay some part of the purchase money straight away so as to show that the purchaser is in earnest in committing himself to pay the rest, on the understanding that the purchaser will not get his earnest money back if he does not complete the sale. For contracts of sale of land it has long been customary practice and established law that the purchaser pays a deposit on account of the purchase money when the contract of sale in writing is made, and cannot recover that deposit if he later fails to complete the bargain and pay the rest; whether or not the vendor’s losses are actually more or less than the amount of the deposit. Notwithstanding the apparent inconsistency the invalidity of contractual penalties does not apply to contractual provisions for forfeiture of reasonable deposits in sales of land. In New South Wales it has long been usual to require a deposit of 10% of the purchase money, and this practice has not encountered challenge; on the other hand provisions relating to forfeiture of purchase moneys other than a reasonable deposit should be regarded as open to challenge. The assumption that provisions for forfeiture of deposits of reasonable amount are effective underlies statutory provisions for relief against their forfeiture; see s.55 of the Conveyancing Act 1919. The exception from the law relating to penalties relates and relates only to deposits, that is, to payments which truly have the character of earnest money paid on all in relation to entering into the Contract, and although provisions of contracts almost always establish what the deposit is, it is not open to parties to avoid the operation of penalties law by designating a payment or an obligation as a deposit if it does not otherwise have that character.
In Queensland a deposit of 10% of the purchase money is ordinarily considered the upper limit; Freedom v AHR Constructions Pty Ltd [1987] 1 Qd R 59. In Mehmet v Benson (1963) 81 WN (Pt 1) (NSW) 188 Jacobs J said:
In my view a normal deposit is ten per cent. I realize that upon one view I should have expert evidence of what usually is the course of business in regard to the amount of deposits, but it seems to me that to require such evidence, when so many contracts are observed in these courts and generally in the community, with a deposit of ten per cent, is to substitute rigidity for reality in one's approach to the matter.
I adopt a similar approach in this case. The deposit of $30,000 is about 3.4% of the purchase price.
There are many decisions which have held that a deposit is an "earnest" of the bargain or its performance. For example Brien v Dwyer [1978] HCA 50; (1978) 141 CLR 378 at 385, 386 and 406. As an earnest a deposit is ordinarily beyond the reach of equitable relief against penalties. Freedom v AHR Constructions Pty Ltd (supra).
I reject the defendants submission that clause 7.1.5 is a penalty and invalid and unenforceable.
In my opinion clause 7.1.5 is an agreed damages clause which determines the damages of the plaintiff. Boucaut Bay Company Limited (In Liquidation) v The Commonwealth (1927) 40 CLR 98 at 106. The plaintiffs claim is limited to the amounts allowed by clause 7.1.5. Paragraph 7.1.5.2b applies because the plaintiffs have resold the property.
The deposit is forfeited by clause 7.1.5.1 of $30,000.
The plaintiffs are entitled to the deficiency in price upon resale of $4,000 “together with all charges and expenses of and incidental to the resale” which would include:
Reconnecting electricity:                $264.15
Property maintenance fees:             $150.00
Conveyancing fees:  $308.00
Total:  $722.15
The items total $4,722.15.
However the defendants are entitled to set off the deposit against the “losses and expenses” which are referred to in para 6 above.
The allowable claim under clause 7.1.5.2b does not exceed the amount of the deposit of $30,000.
In my opinion the entitlement to “charges and expenses of and incidental to the resale” allowed by para 7.1.5.2b does not include the other items which are referred to in paras 3, 4, 6(a), (b), (e), (g), (h), (i), 7, 8 and 9 above. To the extent that the plaintiffs have claimed both those other items and the deposit there is an element of double dipping.
In addition the plaintiffs are entitled to interest pursuant to clause 7.1.1. The defendants are required to pay interest on the full price less the amount of the deposit from the settlement date until the date of termination.
I accept the submission of Mr Grant, who argued this part of the claim for the plaintiffs, that the default rate is 11.47%.
The Settlement Date in the Schedule to the Agreement is 3 July 2008. The amount on which interest is payable is $884,000 less $30,000 namely $854,000. The Agreement was terminated on 18 July 2008. Accordingly the plaintiffs are entitled to interest at 11.47% on $854,000 from 3 July 2008 until 18 July 2008 that is 15 days. The plaintiffs’ entitlement to interest is $4,025.50.
Because the defendants’ case was that the agreed damages clause did not apply they conceded in argument other items of loss which are not covered by clause 7.1.5.2b. In particular the defendants conceded interest on the balance of the purchase monies of $19,520. The total of the items the defendant conceded was $21,438.79. The agreed damages fixed by clause 7.1.5.2b are a substitute for the items totalling $21,438.79. In view of my finding the clause 7.1.5 is not void, the concession has no application. The plaintiffs’ cannot have both. They can only have the damages allowed by the Agreement.
The plaintiffs are entitled to:
The deposit:  $30,000.00
Interest:  $4,025.50
Total:  $34,025.50
There will be judgment for the plaintiffs for the sum of $34,025.50.
The deposit which was paid to the agent and any interest there on is payable to the plaintiffs leaving a balance of $4,025.50 to be paid.