03 Sep Demystifying “non-refundable deposits”, “rouwkoop” and “penalty clauses” in sale of property agreements
The sale or purchase of a property is for many people one of the most important transactions that they will enter into in their lifetime. The parties to a Sale of Land Agreement will inevitably enter into a contractual relationship which will have legal consequences for both the purchaser and the seller. It is often the case that contracts are cancelled and this is when an understanding of certain clauses and their meanings becomes very important.
Non-refundable or forfeiture clause
Sellers are sometimes sold on the idea of including a non-refundable deposit clause in the Contract of Sale. More often than not, sellers are under the impression that they will be entitled to all of the non-refundable deposit or monies already paid to the conveyancer on account of the purchase price if the purchaser breaches a Deed of Sale and such breach results in the cancellation thereof.
The seller will, however, then find out that after cancellation of the contract due to breach, that not all amounts may be retained as liquidated damages or as a non-refundable deposit.
In terms of our case law, Matthews v Pretorius (1984) (3) (SA547W) and the Conventional Penalties Act 15 of 1962 (“the Act”), any penalty or liquidated damages contained in a contractual obligation shall be subject to the provisions of the Act which affords the Court the discretion to, on hearing a claim for a penalty or a non-refundable deposit, find that it might be out of proportion to the prejudice suffered by the creditor and the Court may reduce the penalty to such extent as it may consider equitable under the circumstances, taking in due consideration the interests of all concerned.
This means that any forfeiture stipulation resulting from the cancellation of an agreement, including non-refundable deposits, as well as the retention of certain monies already paid by a purchaser as liquidated damages, will be subject to the measurement as described in the Conventional Penalties Act.
Estate agents should be very careful not to create an expectation with the seller that he or she will be entitled to all of the non-refundable deposit or monies already paid to the conveyancer on account of the purchase price if a purchaser breaches a Deed of Sale of immovable property and such breach results in the cancellation thereof.