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Promise of sale problems – the deposit (part 3)

There is no set rule on how much the deposit in a promise of sale agreement should be, although it is customary to stipulate the payment of 10 per cent of the value of the sale. Photo: Shutterstock.com

There is no set rule on how much the deposit in a promise of sale agreement should be, although it is customary to stipulate the payment of 10 per cent of the value of the sale. Photo: Shutterstock.com

A common feature in all promise of sale agreements is the payment of a deposit. This is not imposed by law and consequently it is up to the parties to agree on whatever suits them best depending on both the circumstances of the parties and the sale. Moreover the parties must agree on how much the deposit is, who is to keep it and whether it will be a deposit paid on account or whether it is forfeitable.

There is no set rule on how much the deposit should be, although it is customary to stipulate the payment of 10 per cent of the value of the sale and this on account of the price. However, any agreement between the parties which differs from the usual 10 per cent is obviously valid, since the will of the parties in any agreement always prevails.  

The parties must also agree on who is going to keep the deposit. The deposit may be paid directly to the seller, or kept by the notary, only to be released on the final deed or on the occurrence of an event agreed to by the parties, such as the obtainment of a development permit or the confirmation of title by the notary after searches are conducted. The safest option for the buyer is to insist that the deposit is kept by the notary however this depends on the parties’ wishes.

The parties must also agree whether the deposit paid will be on account of the sale price or whether this will be forfeitable. It is customary for the deposit to be paid on account, however this also depends on the agreement reached. In both cases, in the event that the sale does not go through for a valid reason at law, such as lack of planning permits or a defect in the title, the deposit is to be returned to the buyer and the promise of sale is rescinded. However, the procedures which the seller must adopt to retain the deposit if things go sour is different depending on what type of deposit is agreed to.

The promise of sale must remain valid and applicable between the parties if the seller is to request retaining the deposit

When the deposit is simply paid on account and the buyer does not have a valid reason to refuse to acquire the property, the deposit is not automatically kept by the seller, and he must opt for judicial redress, since a deposit on account may only be kept if ordered by the court. The seller must file a judicial letter calling upon the buyer to appear on the final deed of sale and this before the term agreed to originally lapses.

Subsequently, within 30 days, he must file a court case requesting that the buyer is ordered to acquire the property according to the terms agreed in the promise of sale, and in default to authorise him to keep the deposit paid on account. If this procedure is not followed rigorously, the parties have to return to the status quo ante, and the deposit has to be returned to the buyer.

The promise of sale must remain valid and applicable between the parties if the seller is to request retaining the deposit. The retention of a deposit paid on account is not an automatic right and must be ordered by the court and this only after the seller has adopted the procedure listed in Article 1357 of the Civil Code.

If not, the seller cannot keep the deposit, and this irrespective of how frivolous and vexatious the buyer’s reason for default is. Once the promise of sale expires, the parties are no longer bound by it and therefore the deposit must be returned. If the promise of sale expires, the buyer does not need to prove that he has a valid reason at law to default and refuse the acquisition in order to get the deposit back. On the other hand, once the seller files judicial proceedings, the onus or burden falls on the buyer.

The legal implications are different when a deposit is forfeitable. Judgements have stated that simply filing a judicial letter calling upon the buyer to appear on the deed of sale is enough for the retention of the deposit when it is forfeitable. There are a number of contradictory judgements on this issue since a number of judgements state that the seller is still bound to file a court case.

However, recent judgements say that filing of a court case is superfluous and that when a deposit is forfeitable, it is the buyer which must file proceedings to prove that his default was justified at law. Despite this, irrespective of what kind of deposit is paid, one must always take the appropriate action before the term agreed to in the promise of sale lapses. Failure to do so may result in the loss of one’s rights at law.

Daniel Buttigieg is a senior associate specialising in Property Law and Dispute Resolution at Fenech & Fenech Advocates.

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