The Court of Appeal in the judgment Gloria Pont vs J.L.J. Construction Company Ltd decided on February 1, should send shock waves down the property industry as it has spelt out in no unclear terms the very strict conditions under which a forfeitable deposit may be forfeited in favour of the vendor.
The sale of an immovable property is normally preceded by a promise of sale agreement (konvenju), where the seller binds himself to sell the immovable property to the purchaser at a price, and the purchaser binds himself to purchase the same immovable property from the seller at that said price.
In the konvenju it is fairly common practice for the purchaser to pay the seller a deposit, normally amounting to 10 per cent of the purchase price. It is also fairly common practice for the seller - to ensure that he/she will not be tying down the property for a period of time without any favourable outcome - to insist that the deposit paid by the purchaser would be forfeited in his favour, "should the purchaser not come forward for the publication of the final deed of sale without a valid reason at law".
Until the above judgment, the common perceived position was that if, upon the expiry of the konvenju, the purchaser does not come forward to purchase the immovable property (without a valid reason at law) the seller has two options:
(i) Either file a judicial letter in Court and pocket the deposit; or
(ii) File a judicial letter and within 30 days file an action in court to compel the buyer to purchase the property as agreed in the konvenju.
The Court of Appeal held in Pont vs J.L.J. that in cases where there is a forfeitable deposit and the purchaser does not come forward for the publication of a final deed of sale, without having a reason justifiable by law, the seller cannot merely file a judicial letter and appropriate the deposit.
The Court of Appeal argued that in view of the wording of section 1357 of the Civil Code (see box), a prospective seller who has been let down by the purchaser must file a judicial letter asking for specific performance and, in addition, within 30 days must also bring a court action demanding specific performance.
This judgment goes against the established practice in the real estate market and against the manner in which forfeitable deposits have been treated by the Maltese courts up till now, yet this judgment is also a most faithful interpretation of the wording of section 1,357, in so far as the validity of the konvenju is concerned.
Naturally, this evolvement in the interpretation of how a forfeitable deposit is to be treated legally leaves the vendor of an immovable property in a rather tight spot. Prior to today it was felt that the payment of a forfeitable deposit on a konvenju granted the vendor sufficient comfort should the prospective purchaser fail to honour his commitment to purchase, since this deposit would be pocketed automatically after the mere filing of a judicial letter at the end of the konvenju period.
However, with the added requirement of also filing an action for specific performance, the vendor is being disadvantaged immensely, for a number of reasons that immediately spring to mind. Firstly pending the action for specific enforcement, the vendor is not in a position to sell the property to any third party and remains with the property locked in litigation; pending the hearing of the action, the vendor is being deprived of the deposit which the purchaser specifically accepted would be forfeitable; and the hearing of a court case (and ancillary appeals and possibly retrials) could take a substantial period of time. It must also be borne in mind that litigation is costly and if the defaulting purchaser is not in a healthy financial situation, then how will the seller recover the costs of litigation?
It is also to be noted - and there might be room for some legal argument to be made - that section 1,357, a section of the law that is used daily, does not make any mention of deposits and its nature.
Indeed this judgment shows clearly that the intervention of the legislator is urgently required, so that section 1357 will be amended to reflect the realities of the property market in 2008, ensuring that a seller is given an adequate and efficient remedy should a purchaser fail to honour the obligations assumed in a konvenju.
1357. (1) A promise to sell a thing for a fixed price, or for a price to be fixed by one or more persons as stated in the foregoing articles, shall not be equivalent to a sale; but, if accepted, it shall create an obligation on the part of the promisor to carry out the sale, or, if the sale can no longer be carried out, to make good the damages to the promisee.
(2) The effect of such promise shall cease on the lapse of the time agreed between the parties for the purpose or, failing any such agreement, on the lapse of three months from the day on which the sale could be carried out, unless the promisee calls upon the promisor, by means of a judicial intimation filed before the expiration of the period applicable as aforesaid, to carry out the same, and unless, in the event that the promisor fails to do so, the demand by sworn application for the carrying out of the promise is filed within 30 days from the expiration of the period aforesaid.
The sale of an immovable property is normally preceded by a promise of sale agreement (konvenju), where the seller binds himself to sell the immovable property to the purchaser at a price, and the purchaser binds himself to purchase the same immovable property from the seller at that said price.
In the konvenju it is fairly common practice for the purchaser to pay the seller a deposit, normally amounting to 10 per cent of the purchase price. It is also fairly common practice for the seller - to ensure that he/she will not be tying down the property for a period of time without any favourable outcome - to insist that the deposit paid by the purchaser would be forfeited in his favour, "should the purchaser not come forward for the publication of the final deed of sale without a valid reason at law".
Until the above judgment, the common perceived position was that if, upon the expiry of the konvenju, the purchaser does not come forward to purchase the immovable property (without a valid reason at law) the seller has two options:
(i) Either file a judicial letter in Court and pocket the deposit; or
(ii) File a judicial letter and within 30 days file an action in court to compel the buyer to purchase the property as agreed in the konvenju.
The Court of Appeal held in Pont vs J.L.J. that in cases where there is a forfeitable deposit and the purchaser does not come forward for the publication of a final deed of sale, without having a reason justifiable by law, the seller cannot merely file a judicial letter and appropriate the deposit.
The Court of Appeal argued that in view of the wording of section 1357 of the Civil Code (see box), a prospective seller who has been let down by the purchaser must file a judicial letter asking for specific performance and, in addition, within 30 days must also bring a court action demanding specific performance.
This judgment goes against the established practice in the real estate market and against the manner in which forfeitable deposits have been treated by the Maltese courts up till now, yet this judgment is also a most faithful interpretation of the wording of section 1,357, in so far as the validity of the konvenju is concerned.
Naturally, this evolvement in the interpretation of how a forfeitable deposit is to be treated legally leaves the vendor of an immovable property in a rather tight spot. Prior to today it was felt that the payment of a forfeitable deposit on a konvenju granted the vendor sufficient comfort should the prospective purchaser fail to honour his commitment to purchase, since this deposit would be pocketed automatically after the mere filing of a judicial letter at the end of the konvenju period.
However, with the added requirement of also filing an action for specific performance, the vendor is being disadvantaged immensely, for a number of reasons that immediately spring to mind. Firstly pending the action for specific enforcement, the vendor is not in a position to sell the property to any third party and remains with the property locked in litigation; pending the hearing of the action, the vendor is being deprived of the deposit which the purchaser specifically accepted would be forfeitable; and the hearing of a court case (and ancillary appeals and possibly retrials) could take a substantial period of time. It must also be borne in mind that litigation is costly and if the defaulting purchaser is not in a healthy financial situation, then how will the seller recover the costs of litigation?
It is also to be noted - and there might be room for some legal argument to be made - that section 1,357, a section of the law that is used daily, does not make any mention of deposits and its nature.
Indeed this judgment shows clearly that the intervention of the legislator is urgently required, so that section 1357 will be amended to reflect the realities of the property market in 2008, ensuring that a seller is given an adequate and efficient remedy should a purchaser fail to honour the obligations assumed in a konvenju.
1357. (1) A promise to sell a thing for a fixed price, or for a price to be fixed by one or more persons as stated in the foregoing articles, shall not be equivalent to a sale; but, if accepted, it shall create an obligation on the part of the promisor to carry out the sale, or, if the sale can no longer be carried out, to make good the damages to the promisee.
(2) The effect of such promise shall cease on the lapse of the time agreed between the parties for the purpose or, failing any such agreement, on the lapse of three months from the day on which the sale could be carried out, unless the promisee calls upon the promisor, by means of a judicial intimation filed before the expiration of the period applicable as aforesaid, to carry out the same, and unless, in the event that the promisor fails to do so, the demand by sworn application for the carrying out of the promise is filed within 30 days from the expiration of the period aforesaid.