Define: Forfeiture Of Deposit

Forfeiture of deposit refers to the loss of a deposit made in a contractual agreement when one party fails to fulfil their obligations or breaches the terms of the contract. Typically, the deposit is paid by one party to secure the performance of the other party. If the party who provided the deposit fails to meet their obligations, the other party may be entitled to keep the deposit as compensation for the breach. For example, in real estate transactions, if a buyer fails to complete the purchase of a property as agreed, they may forfeit their deposit to the seller. The specific conditions for forfeiture of deposit are usually outlined in the contract governing the agreement.

It is extremely common for contracts for the sale of land to include a clause to the effect that the purchaser must provide a deposit, and that the deposit will be forfeit if the purchaser does not complete the transaction. Such a clause is, in effect, a penalty clause, and not a Liquidated Damages Clause. This is because deposits are often very large — 10% of the purchase price is not unusual — and the losses suffered by the disappointed seller are frequently not that great.

Traditionally the courts have been reluctant to enforce penalty clauses, but contracts for the sale of land are one of a small number of exceptions to this policy. The reasons given, usually centre on the fact that land transactions are usually of very great importance to the parties concerned, and a high level of certainty is required. However, because the forfeiture is so punitive, a court is empowered by s.49(2) of the Law of property act (1925) to order a return of the deposit where it would be in the interests of justice to do so.

Because the forfeiture of the deposit is held to fulfil an important social function, the courts are reluctant to exercise this power. For example, in Omar v El Wakil (2002) it was held that the fact that the seller was unable to show that he had suffered any loss was not a good reason to order a return of the deposit to the buyer. However, in Tennaro v Majorarch (2003) the buyer in default offered to enter into a new contract to purchase the property, and at a higher price than the market value. The seller refused, despite the favourable terms of the new contract. The court held that his refusal was an attempt to capitalise on the forfeiture clause, and he was ordered to return the deposit.

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This glossary post was last updated: 29th March, 2024.