Clauses in Sale of Property agreements
The sale or purchase of a property is a very important transaction in one’s life. 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.
- Breach of Contract
The relationship between a purchaser and seller is governed by the Contract of Sale. The breach of contract occurs generally when a party to a contract without lawful excuse fails to honour his or her obligations under the contract.
When a contract is cancelled in terms of the breach clause of the said contract, the aggrieved party would normally have the right to claim damages from the guilty party. When claiming damages, the aggrieved party must note that the Conventional Penalties Act will also be applicable to the amount of damages that may be claimed.
In the instance of the seller, the seller’s damages will often only be liquidated once the property is resold and the seller’s claim will only be for the deficit between the amount of resale and the original contract sum of the cancelled agreement.
- Rouwkoop
A rouwkoop clause in its pure form comes from our common law. It is derived from the Dutch words meaning “regret and purchase”. Such a clause entitles a party to a contract to pay a sum of money in order to be allowed to withdraw from the contract. It essentially sets a purchase price for freedom from the contract payable by the purchaser. If the purchaser then withdraws from the contract and pays the agreed rouwkoop amount, he will be acting in accordance with the terms of the agreement and his withdrawal will not constitute a breach of contract. (It is not regarded as a penalty.) This is clearly very distinguishable from a penalty clause which would come into operation only where there was a breach of contract.
Unfortunately, many sale agreements confuse the position in law whereby the forfeiture clause is merged with a rouwkoop clause, which provides that if the purchaser breaches the agreement and the seller cancels the agreement as a result thereof, the purchaser will forfeit his or her deposit as rouwkoop.
From the said case law and the provisions of the Act above, it is clear that:
- Non-refundable deposits are a myth and together with forfeiture clauses, subject to scrutiny by the Courts.
- A rouwkoop clause in a Deed of Sale must be clearly distinguished from the penalty clauses above as it is not subject to the provisions of the Conventional Penalties Act.
Before purchasing a property, consult with an attorney to ensure that you understand exactly what you are agreeing to.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)