Proietti-Formaggio v Sacca [2022] NSWSC 1019 | Case summary

Determination

By cl 2 of the contract, the deposit of $235,000 (as identified on the front page of the contract) was required to be paid by the purchaser on the making of the contract. Indeed, payment by that time was an essential obligation. The defendants in fact paid a deposit at the time of exchange of only $5,875 (or, 0.25% of the price). Strictly, the defendants were thereby in breach of the contract in an essential respect, but the plaintiffs raised no complaint, and at least initially made no demands for the balance of the deposit to be paid.
However, there is no evidence that the plaintiffs ever agreed to accept an amount of less than $235,000 as the deposit under the contract. I note that Mr Proietti-Formaggio and Ms Burnett gave evidence to the contrary, and that such evidence went unchallenged. Moreover, such an agreement cannot be inferred from the plaintiffs' lack of complaint and initial absence of demand. That conduct must be viewed in light of the fact that the contract was subject to a cooling-off period during which the purchaser could rescind and forfeit only 0.25% of the purchase price, such cooling-off period being for an initial period of 10 business days, with the period later extended by agreement to 12 January 2021. There would be little point in demanding payment of the balance of the 10% deposit for so long as it was open to the defendants to rescind and forfeit only the $5,875 they had actually paid. I note further that there are clear indications in the evidence that, at the end of the cooling-off period, the parties understood that the balance of the 10% deposit remained payable. Examples include: Ms Burnett's emails to Mr Keserovic on 13 January 2021; Mr Keserovic's enquiry to Ms Burnett on 14 January 2021 as to whether the agent had received the deposit; and Mr Keserovic's email to Ms Burnett on 21 January 2021 which referred to a present inability to pay "the whole deposit", and an intention to make a payment of $10,000 "towards" the deposit.
In these circumstances, I do not think it can be said that the vendor has agreed to "accept a reduced deposit" within the meaning of Special Condition 8 of the contract. That being so, the condition is not engaged, and does not operate in relation to any recovery of the deposit following a default by the purchaser. It is thus not necessary to consider whether Special Condition 8 is unenforceable as being in the nature of a penalty. In any case, as already mentioned, the plaintiffs rest their claim for recovery of the balance of the deposit upon cl 9.1 of the contract, not Special Condition 8.
Clause 9.1 operates where the purchaser does not comply with the contract (or a notice under or in relation to the contract) in an essential respect, and the vendor terminates the contract by notice. Here, the plaintiffs terminated the contract following the defendants' failure to complete within the time required by the Notice to Complete served on 1 February 2021.
The plaintiffs were entitled to serve the Notice to Complete on 1 February 2021 as the contract failed to complete on 29 January 2021 (see cl 15). Further, the Notice to Complete fixed a time for completion of not less than 14 days from the date of service, being a period deemed by the parties to be sufficient (see Special Condition 4(a)). The notice was thus effective to make time of the essence for completion of the contract by no later than 15 February 2021, but it seems that the defendants took no steps towards completion. The failure of the defendants to complete within that time was a failure to comply with the contract in an essential respect. It was not submitted that the plaintiffs were not ready, willing and able to complete. In my opinion, the plaintiffs were entitled to terminate the contract on 16 February 2021. The defendants did not make any submission to the contrary.
In these circumstances, cl 9.1 of the contract entitles the vendor to keep or recover the deposit to a maximum of 10% of the price (i.e., $235,000). The plaintiffs seek to recover $219,125 from the defendants, being the unpaid portion of the $235,000 deposit. (Presumably, the plaintiffs have already recovered the $15,875 that was paid by the defendants). The plaintiffs are entitled to recover the claimed amount of $219,125 unless the defendants succeed in obtaining relief against the forfeiture of the deposit, pursuant to s 55(2A) of the Conveyancing Act. I turn now to consider that claim for relief.
The relevant principles were recently summarised by me in Culjak v Akrawe [2022] NSWSC 949 at [83]-[87] as follows: Section 55(2A) of the Conveyancing Act provides: In every case where the court refuses to grant specific performance of a contract, or in any proceeding for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit with or without interest thereon. As explained by Santow JA in Havyn Pty Ltd v Webster (2005) 12 BPR 22,837; [2005] NSWCA 182 at [137], s 55(2A) created a jurisdiction to relieve against forfeiture of a reasonable deposit that was hitherto unknown to courts of equity (see also Luu v Sovereign Developments Pty Ltd (2006) 12 BPR 23,629; [2006] NSWCA 40 at [24]). In Lucas & Tait (Investments) Pty Ltd v Victoria Securities Ltd [1973] 2 NSWLR 268, Street CJ in Eq stated at 272: It is one thing to recognize that there is a wide discretion conferred upon the court under this section; it is another thing to determine the guidelines for the exercise of that discretion. The section was designed to provide relief to a purchaser against an unjust and inequitable consequence of forfeiture of a deposit. It is clear enough that at law a vendor's right to forfeit a deposit to himself in the event of a purchaser's default bears no necessary relation to the damages actually suffered by a vendor. At law a forfeited deposit could result in a vendor making a profit which in justice and equity he ought not to be permitted to enjoy at the purchaser's expense. In a complementary sense, an order for the return of the deposit does not necessarily affect the vendor's right to sue a defaulting purchaser at law and recover against him such damages as the vendor can prove. The jurisdiction under s 55(2A) does not give to a court an overall discretionary supervision of monetary adjustments between parties to a contract under which a deposit was paid but which has been terminated. A vendor who forfeits a deposit in strict enforcement of his legal rights is not to be deprived of it under s 55(2A) unless it is unjust and inequitable to permit him to retain it. It is not necessary to demonstrate special or exceptional circumstances in order to justify an exercise of the discretion under s 55(2A) (see Harkins v Butcher; Butcher v Lachlan Elder Realty Pty Ltd (2002) 55 NSWLR 558; [2002] NSWCA 237 at [77]; Havyn Pty Ltd v Webster (supra) at [149]). However, a proper approach to the discretion must appreciate the legal context of the established nature of a deposit as an earnest of performance in conveyancing transactions (see Havyn Pty Limited v Webster (supra) at [150]-[151]). As Santow JA stated in Havyn Pty Limited v Webster (supra) at [155]: For these reasons, I do not consider that there is anything controversial in the submission of the vendor that the grounds in support of an application to repay the deposit must be sufficient to warrant a departure from holding the purchaser to its obligations under the contract. Indeed, this goes to the "justice and equity" of the case, drawing on the observations of Street CJ in Eq in Lucas & Tait. That conclusion must be correct, if the notions of justice and equity conditioning the discretion are to have some meaning drawn from the purpose of a deposit and the circumstances in which it is forfeited. The purchaser must therefore do more than merely show that the deposit has been forfeited, and that it will thus result in a 'windfall' to the vendor as will usually be the case. The Court should not take an approach to ordering the return of deposits under s 55(2A) which weakens the proper function of a deposit in providing a sanction so that purchasers treat the making and completing of contracts with due seriousness: Wilson v Kingsgate Mining Industries [1973] 2 NSWLR 713 at 735, Fraser v L O'Malley & Sons Pty Ltd (1975) 2 BPR 9133 at 9139-40. In so saying, I am not to be understood as putting a gloss upon the plain words of s 55(2A), but merely highlighting the critical importance of a judge exercising the wide discretion according to its plainly beneficial purpose to consider 'justice' and 'fairness' in their proper context. See also the observations of Kirby J regarding the important role played by the payment of deposits in contracts for the sale of land in Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367; [2003] HCA 58 at [54].
I should add that s 55(2A) can operate in respect of an unpaid deposit. As explained by McLelland CJ in Eq in Socratous v Koo (1993) 6 BPR 13,226 at 13,228, the section may be relevant in either an action to recover an unpaid deposit (as in the case here), or in a claim for damages for breach of an obligation to pay a deposit. His Honour stated: In the former class of case, it would in my view be open to a purchaser sued for the amount of a deposit to raise as a defence a contention to the effect that if the deposit were to be paid the circumstances are such that the court would order its repayment to the purchaser on an application under s 55(2A). Such a defence would be available to avoid circuity of action. In the latter class of case, into which the claim for damages in the present proceedings falls, it would be open to a purchaser to rebut the proposition that the amount of the unpaid deposit should be included as an element in the damages suffered by the vendor, by raising a contention to the effect that if the deposit had been paid, and had been subsequently forfeited to the vendor, the court would nevertheless have ordered its repayment to the purchaser on an application under s 55(2A). (See also Kylsilver Pty Ltd v One Australia Pty Ltd (2001) 10 BPR 18,545; [2001] NSWSC 226 at [13] per Hamilton J, and Golding v Vella (2001) 10 BPR 18,919; [2001] NSWSC 567 at [33] per Barrett J.)
It is thus open to the defendants to raise as a defence a contention that, if the deposit were to be paid, the circumstances are such that the Court would order its repayment under s 55(2A).
In this regard, the defendants pleaded their defence as follows: i. the Plaintiffs sold the Property for $2,530,000 being $180,000 above the Contract Price; ii. the Plaintiffs have not suffered loss as a result of the Defendants conduct iii. the vendor's agent under the contract (Agent) as agent of the Plaintiffs represented to the Defendants that the Plaintiffs would not terminate the Contract; iv. the Defendants were making genuine efforts to complete the Contract; v. the Defendant notified the Agent of the genuine efforts made; vi. pursuant to section 55(2A) of the Conveyancing Act 1919 (NSW) a Court may order the repayment of the deposit with or without interest; and vii. the Court ought to order the repayment of the Deposit to the Defendants on the grounds that its forfeiture is unjust;
The matter in (i) was established on the evidence. As for (ii), the evidence disclosed that the failure of the defendants to complete caused the plaintiffs to incur additional marketing costs in the order of $7,000. As for (iii), there was no evidence of any representation made by the plaintiffs' agent (Mr Haddan) that the plaintiffs would not terminate the contract, and no such suggestion was put to Mr Haddan in cross-examination. The defendants did not adduce evidence of the genuine efforts made by them to complete the contract, as asserted in (iv), or of the notification of such efforts to Mr Haddan, as asserted in (v). Again, it was not suggested to Mr Haddan in cross-examination that he was informed of such efforts.
The evidence does establish that the defendants made efforts, over a considerable period, to obtain finance. On 21 January 2021, the defendants' solicitors informed the plaintiffs' solicitors that a conditional approval had been obtained "for 100% of the price". However, no conditional loan approval was ever shown to the plaintiffs, despite requests that it be provided. I note further that Ms Burnett gave unchallenged evidence to the effect that at no time after service of the Notice to Complete did the defendants give any indication that they wanted to settle the contract, or could settle the contract. The circumstances in which the defendants failed to complete were thus left unexplained.
This is not a case where it can be said that the failure of the purchaser to complete was brought about by, or contributed to in some way by, any conduct on the part of the vendor. Nor has it been shown that the failure to complete occurred due to factors outside the control of the purchaser. In the absence of an explanation from the defendants, the Court simply does not know what circumstances ultimately caused the failure to complete.
It is clear that the strongest factors in favour of granting relief under s 55(2A) are that the plaintiffs suffered very little loss as a result of the defendants' failure to complete, and were indeed able to resell the property quickly for a price $180,000 greater than the price under the contract with the defendants.
The fact that the plaintiffs resold the property at a profit seems to me to be a factor of considerable weight, though not decisive on its own. It has been said that the fact that the property was resold for an increased price is not normally itself sufficient to warrant an order under s 55(2A) (see, for example, Baird v Chambers (2010) 15 BPR 28,337; [2010] NSWSC 272 at [16] per Ball J. See also Clurstock Pty Ltd v Timanu Pty Ltd (1988) NSW ConvR 55-419 at 57,831 per Young J; Nassif v Caminer (2009) 74 NSWLR 276; [2009] NSWCA 45 at [68] per Macfarlan JA). The decision of Holland J in Barrett v Beckwith (No 2) (1974) 1 BPR 9439 is an illustration of the point. In that case, relief was declined, notwithstanding that the value of the land had increased by between 20 and 30 percent above the contract price. His Honour observed (at 9444) that were relief to be given simply on that basis: … the result would be that in any case in which a purchaser had no merits whatever in respect of the purchaser's performance under the contract or in respect of the grounds upon which the contract has gone off, and in which there was a continuing increase in the value of the subject land, the purchaser could default without any fear that the deposit was in jeopardy. (See also Terry v Permanent Trustee Australia Ltd (1995) 6 BPR 14,091 at 14,108-9 per Santow J).
The contract in this case was on foot from 30 November 2020 to 16 February 2021. The plaintiffs accommodated the defendants' requests in relation to cooling-off periods, such that the period was ultimately extended to 12 January 2021. The defendants did not seek to exercise the right to rescind during that period, so the contract remained binding upon them. Even though it was recognised, at least by the defendants' solicitors, that the defendants were required to pay the balance of the 10% deposit, only a further $10,000 was paid. The plaintiffs took no action in respect of that state of affairs, and afforded the defendants every opportunity to complete the purchase. The defendants did not at the time explain, and have not since explained, the circumstances in which they failed to complete. The evidence is unclear as to whether the defendants did not complete because they were unable to complete within the required time or, having the ability to do so, chose not to for some reason. A text message sent by Mr Sacca to Mr Haddan on 20 February 2021 suggests the former is more likely, but no firm conclusions can be drawn from the evidence as a whole. If the defendants were in fact unable to complete, it is unclear whether they were nonetheless likely to become able to complete within some further period.
The lack of explanation for the failure to complete, which is the event that grounds the forfeiture of the deposit, makes it very difficult for the Court to reach a conclusion that, in all the circumstances, it would be unjust or inequitable to allow the plaintiffs to recover the deposit that was bargained for (see Nwai Pty Ltd v Johnston (2005) 12 BPR 23,939; [2005] NSWSC 1368 at [16] per Windeyer J). Ordinarily, it would be expected that a purchaser seeking relief under s 55(2A) would provide a full account of the circumstances that led to the forfeiture of the deposit. In the absence of such an account in the present case, and notwithstanding the fact that the plaintiffs were able to quickly resell for a considerably enhanced price, I am unable to be satisfied that in all the circumstances it would be unjust or inequitable to allow the plaintiffs to recover, and retain, the deposit. That is to say, the Court is not satisfied that the circumstances are such as to warrant the exercise of the discretion under s 55(2A) to make an order for the return of the deposit.
For the above reasons, the defendants' defence based on s 55(2A) of the Conveyancing Act has not been made out.

Proietti-Formaggio v Sacca

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