ABG Property Newsletter – May 2013

Deposit payments and breach of contract

Where property or a substantial asset is being sold, very often the contract provides for the buyer to pay a proportion of the purchase price on exchange or prior to completion. The payment can be classified either as a deposit or as part payment of the purchase price. The difference is important because if the buyer fails to complete the contract, the seller can forfeit a deposit but not a part payment. The buyer can claim a refund of an advance payment, although the buyer must still pay damages to the seller for any loss suffered as a result of the buyer’s breach.

What happens if the buyer fails to pay the deposit by the time specified in the contract? This was the situation in a recent case involving the sale of a ship. The contract provided for the buyer to pay a 10% deposit within 3 days of the contract being signed. The buyer failed to pay the deposit and so the seller terminated the contract because of the buyer’s breach of contract.

The buyer argued that, although the seller would have been entitled to retain the deposit had it already been paid, it could not claim payment of the deposit following termination of the contract, but was limited to claiming damages (which would have been substantially less than the amount of the deposit). However, the Court rejected this argument and ruled that the seller was entitled to claim payment of the deposit from the buyer. It was clear from the contract terms that the deposit was intended to be security for the buyer’s performance and the right to payment of the deposit had already accrued before the contract was terminated by the seller. It was said that the buyer could not be in a better position by failing to pay the deposit than it would have been in had the deposit already been paid.

This case shows that the terms of a contract should make it clear whether an initial payment is intended to be a deposit or only a part payment of the purchase price. Also that a seller should ensure that the obligation to pay the deposit arises as soon as possible so that it can be forfeited if the buyer defaults.

Planning obligations

A planning obligation can be contained either in a bilateral agreement between the local planning authority and a land owner or developer (made under s.106 of the Town & Country Planning Act 1990 and known as a s.106 Agreement) or in a unilateral undertaking made by the land owner or developer alone.

The purpose of planning obligations is to restrict the development or use of land or to require operations or activities to be carried out on the land or a use to be carried on. The planning authority can enforce planning obligations against both the original covenantor and against anyone who later acquires the land.

In a recent case, the local planning authority refused planning permission for an integral garage to be converted into residential accommodation. Planning permission was needed because an earlier planning permission stated that the garage could only be used as garaging. This reflected the authority’s policy of retaining off-street parking.

The house owner appealed against the refusal and entered into a unilateral undertaking not to apply for an on-street parking permit or to permit any owner or occupier of the property to do so. The undertaking said it was a planning obligation pursuant to s.106.

An inspector allowed the appeal and granted planning permission for the garage to be converted into residential accommodation. However, the planning authority then applied to the Court to quash the permission, arguing that the unilateral undertaking was not a valid planning obligation under s.106. It suggested alternative wording under which the owner would covenant that the property would not be occupied if an application for a parking permit was made.

The Court upheld the planning authority’s application and quashed the planning permission. The Court ruled that the unilateral undertaking was not a valid s.106 planning obligation but was a purely personal undertaking by the property owner. This was despite the fact that the undertaking itself said it was an obligation for the purposes of s.106. The undertaking did not have the effect of restricting the development or use of the property nor did it require operations or activities to be carried out or a use to be carried on.

The ruling shows that a label in a document is not in itself decisive and that a planning obligation will only be valid under s.106 of it satisfies one of the requirements of that section. Where there is a valid planning obligation it runs with the land, but if not, it is only a personal obligation and will not bind future owners or occupiers.

Carrying out works “with due diligence”

In a recent case the Court confirmed that a developer was in breach of its contractual obligation to carry out works with due diligence when it stopped work on a project for over a year.

The developer suspended work on the project because the recession had rendered it unviable. It said that continuing the work would have been commercial suicide. Claims for damages were then brought by the prospective tenants of the development who alleged that the developer was in breach of the agreement for lease which contained 2 separate clauses requiring the developer to carry out the works diligently and to use all reasonable endeavours to ensure that the works were completed as soon as reasonably practicable.

The Court confirmed that the obligation to carry out the works diligently carried with it notions of “assiduity/expedition” and that the developer had two separate obligations. Even if stopping work was not a breach of the obligation to ensure the works were completed as soon as reasonably practicable, it was still a breach of the due diligence obligation.

The developer’s argument that continuing the project would have been commercial suicide was rejected as providing a defence to the claims.

Rent in advance or tenant’s deposit?

Where a tenant of an assured shorthold tenancy pays a deposit, the landlord must protect the deposit by using an authorised Tenancy Deposit Scheme operated by an approved scheme administrator. This requirement was introduced by the Housing Act 2004.

If the deposit is not protected properly in an authorised scheme, the landlord will encounter difficulties in regaining possession of the property after expiration of the tenancy and will not be able to use the accelerated procedure which is contained in the Housing Act 1988.

If a tenant makes a substantial advance payment of rent, is this a rent payment or a deposit payment? This question arose in a recent case where a tenant was obliged to pay both a deposit and a sum equal to 6 months’ rent to the landlord’s agent before she took possession. The deposit was paid into a Tenancy Deposit Scheme, but the agents retained the advance rent payment and paid an amount equal to the monthly rent to the landlord each month.

After expiry of the fixed term of the tenancy, the tenant remained in occupation under a periodic tenancy under which the rent was payable monthly. When the tenant fell into arrears, the landlord sought possession.

The tenant then argued that the advance payment at the start of the tenancy had in fact been a deposit. Although this argument was accepted by the County Court Judge, that ruling has been set aside by the Court of Appeal. The Court held that the sum representing 6 months’ rent at the start of the tenancy was not a payment made by way of security for performance of the tenant’s obligations but was a genuine payment in advance of the first 6 months’ rent.

This decision should be welcome news for landlords who seek payment of rent in advance as a means of reducing the chance of the tenant defaulting on the rent payments.
The comments in this note are of a general nature only. Full advice should be sought on any specific problems.

Siobhan Goodacre
+44 (0)115 934 3325

Wendy Shaw
+44 (0)115 934 3303