Introduction

In this month’s article, we look at a case where purchasers of a property (the “Property”) had their deposit forfeited. The purchasers had entered into an agreement to purchase the Property in 2015, which was annulled later due their non-payment. They later entered into a fresh agreement with the vendor in 2018. This later agreement was also terminated because the purchasers had failed to meet payment obligations. The purchasers sued the vendor for the return of the sums paid towards the later agreement.

Facts

On 28 December 2015, the Applicants entered into a Sale and Purchase Agreement (“S&P1”) with the Respondent, a developer of private properties, to purchase the Property. The Property was sold at the purchase price of $1,785,000. Under S&P1, the Respondent was entitled to forfeit the deposit, amounting to $357,000 (being 20% of the purchase price), should the Applicants breach S&P1 resulting in its annulment.

S&P1 was annulled on 12 March 2018, when the Applicants did not pay the sums as required under the terms of S&P1, and the Respondent informed the Applicants that it was entitled to retain the sum of $379,195.58. This amount comprised of the 20% deposit, as well as interest on outstanding payments. As the Applicants had paid $1,217,550 by then, the Respondent informed them that the sum of $838,354.42 would be returned to them.

The Applicants then struck a new bargain with the Respondents. On 30 April 2018, the Applicants and Respondent entered into a new agreement under an Option to Purchase (“OTP2”). The purchase price was revised upwards to $1,900,000. Other terms included the crediting of $357,000 towards the option fee of S&P2, and to credit the sum of $838,354.42 towards the deposit of OTP2 and further payments thereafter. This would amount to a total of $1,195,354.42.

The Applicants failed to complete the purchase on 26 June 2018 as they again did not make the required payments after repeated reminders and extensions of time. The Respondent then served the Applicants a Notice to Complete on 24 October 2018. This meant that the Applicants would have to fully pay off their payment obligations in 21 days, or OTP2 would be terminated. The termination took place on 20 November 2018, by way of a letter from the Respondent to the Applicants. The Applicants accept that OTP2 was validly terminated.

On 21 March 2023, the Applicants wrote to the Respondents, seeking the return of $1,195,354.42 together with interest calculated from 20 November 2018. The Applicants alleged that the retention of the sum was a penalty instead of the forfeiture of deposit. In response, the Respondent replied on 10 April 2023 that the sum of $380,000 would be retained by them as the forfeited deposit under OTP2, and the sum of $326,397.38 was set off as cost and expenses incurred as a result of the termination of S&P1 and OTP2. The remainder sum of $488,957.04 would be returned to the Applicants. This sum was paid on 19 April 2023.

 The Applicant’s case

The Applicants argued that the Respondent did not have the right to forfeit the $380,000 deposit. They claimed that the forfeited sum should not be considered a “true deposit” because it exceeded what was reasonably necessary to serve as earnest money, and it was essentially a penalty. The Applicants emphasized that they had repeatedly breached their obligations under the contract but argued that these breaches did not warrant the forfeiture. They believed that the Respondent had been unjustly enriched by keeping the deposit. Furthermore, the Applicants disputed the Respondent’s right to set off their claimed expenses, insisting that this should be treated as a separate claim. They sought the return of the deposit and interest on the entire sum they had paid, asserting that they had been wrongfully denied the use of their money. They proposed an interest rate of 5.33% per annum, running from the date of the contract’s termination.

The Respondent’s case

The Respondent argued that they had the contractual power to forfeit the $380,000 deposit under the terms of the agreement. They contended that Condition 15.9(c)(i) of the Law Society of Singapore’s Conditions of Sale 2012 (the “Conditions”), which was incorporated into OTP2, allowed them to retain and use any portion of the deposit upon the termination of the contract if the Applicants failed to comply with a notice to complete. The Respondent asserted that this provision gave them the discretion to forfeit a lesser part of the total deposit, which included the sum of $1,195,354.42. They insisted that the Applicants’ repeated breaches and non-compliance with previous agreements justified their demand for assurance and the use of the deposit as earnest money. They also argued that 20% of the purchase price represented a reasonable amount for the deposit, and the Applicants were well aware of this, given their previous contract’s forfeiture. The Respondent further contended that the issue of whether Condition 15.9(c)(i) of the Conditions constituted a penalty was irrelevant since they were forfeiting a true deposit. They also sought the right to set off their expenses incurred in preparation and following the terminated transaction, referencing previous court decisions to support this claim.

The Court’s findings

The Court had found that if the sum of $380,000 was the true deposit, the Respondent would have the power to forfeit the same. In considering whether the said sum was the true deposit, the Court considered the context under which the agreement was made.

The Applicants would invariably fail in their case for the return of the full $1,195,354.42 as the sum of $357,000 was paid to the Respondent as the Option Fee for OTP2, which the Respondent was entitled to retain in any event. The Applicants had not previously disputed that 20% of the purchase price under S&P1 was not a true deposit, and hence Applicants could not contend that forfeiture of this amount was unreasonable. Further, the Court noted that both the Applicants and Respondent were legally represented when entering into lengthy negotiations that culminated into OTP2.

As neither party submitted on whether the sum of $1,195,354.42 should be forfeited in full, the Court had restricted its determination to the sum of $380,000 being the true deposit.

Further, while the Court had determined that the Respondent was entitled to set-off expenses that were incurred, it had also found for the Applicants that interest would be payable for any sums that were improperly withheld from the Applicants. The determination of the amount to be set-off, specific interest rate, and the period from which interest was to commence was reserved to a separate hearing.

Lessons learnt

This case demonstrates that it is important to understand your rights and obligations prior to entering into an agreement to purchase property, or exercising your right to purchase under an Option to Purchase. The failure to meet payment obligations may result in not only the forfeiture of the deposit under the agreement, but one may also be liable for further expenses incurred as a result of the termination of the said agreement.

On the other hand, if the Vendor wrongfully withholds funds that is to be refunded to the Purchaser, the Vendor may be liable to refund the same with accrued interest.

Our experienced conveyancing team have a wealth of experience and knowledge on property related matters. This allows us to provide you with sound and practical advice on your queries. Should you have any questions pertaining to your property or other conveyancing matters, please reach out to our lawyers or Business Development team.