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Cancellation of Sale Agreements and Retention of Deposits as a Penalty

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More often than not one is confronted with non-refundable deposits in offers to purchase of immovable property.

In the same vein, most deeds of sale contain breach clauses worded that, in the event of a contractual breach on the part of the purchaser, which breach is not rectified within a specific period of time, the Seller can cancel such agreement and retain all amounts paid by the Purchaser in respect of the purchase price as a penalty. This provision is not accurate


In terms of our case law (see Mathews v Pretorius(1984) (3) SA547W) and the Conventional Penalties Act (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. It specifically provides in section 3 as follows:


"If upon the hearing of a claim for a penalty, it appears to a court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extend as it may consider equitable under the circumstances: Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor's proprietary interest, but any other rightful interest that may be effected by the act or omission in question."

A forfeiture stipulation resulting from the withdrawal from an agreement is also covered by the stipulations of the Act quoted above. In other words it applies to non-refundable deposits as well as the retention of certain amounts already paid by a Purchaser as liquidated damages.


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