The Sunday Mail
Legal Matters with Arthur Marara
The sale or purchase of property involves serious financial commitments.
There is need for greater care, caution and clarity in the terms of the agreement.
These agreements have serious legal ramifications for both the purchaser and seller.
When a contract is cancelled, an understanding of certain clauses, in particular penalty clauses and their meanings, becomes very important.
Non-refundable or forfeiture clause
There is a practice by most sellers to include the idea of a non-refundable deposit clause in the contract of sale. Most sellers usually labour 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, especially if the purchaser breaches an agreement of sale, and such breach results in the cancellation thereof.
The seller, however, later finds out that after cancellation of the contract due to a breach, not all amounts may be retained as liquidated damages or as a non-refundable deposit.
In terms of the law, any penalty or liquidated damages contained in a contractual obligation shall be subject to the provisions of the Contractual Penalties Act [Chapter 8:04] (hereinafter referred to as the “Contractual Penalties 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.
The court may reduce the penalty to such an extent as it may consider equitable under the circumstances, taking in due consideration of the interests of all concerned.
This means 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 “Contractual Penalties Act”.
There is need for professional advisers in property transactions to be forthright and candid with clients to avoid creating 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, particularly if a purchaser breaches an agreement of sale of immovable property and such breach results in the cancellation thereof.
The role played by conveyancers or estate agents in transactions is important.
The conveyancer cannot be a judge and jury when dealing with monies in their trust account when a dispute arises about who should be the rightful recipient of such monies once the agreement of sale is cancelled.
The conveyancer/estate agent cannot disburse the money to either party unless and until such time as an agreement has been reached between the parties or a competent court has made an order.
Breach of contract
The relationship between a purchaser and seller is governed by the agreement of sale.
The breach of contract arises 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 usually has the right to claim damages from the defaulting party.
However, when claiming damages, the innocent party must note that the “Contractual Penalties Act” will also be applicable to the amount of damages that may be claimed.
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 emanates from our common law.
It is derived from the Dutch words meaning “regret and purchase”.
This clause entitles a party to a contract to pay a sum of money in order to be allowed to withdraw from the contract.
It 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 distinguishable from a penalty clause, which would come into operation only where there was a breach of contract.
Many sale agreements, however, confuse the legal position, 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.
The court, in this instance, found that the deposit was not an amount as envisaged by the rouwkoop clause in the true intention of the rouwkoop clause history. A penalty clause will only come into operation when there was a breach of the contract.
From a perusal of the Contractual Penalties Act, it can be summarised that:
· Non-refundable deposits and together with forfeiture clauses are subject to scrutiny by the courts. There is no automatic forfeiture. In the absence of an agreement between the parties regarding the penalty, the court’s intervention must be sought to quantify the amount payable as a penalty.
· A rouwkoop clause in a sale agreement must be clearly distinguished from the penalty clauses above as it is not subject to the provisions of the Contractual Penalties Act.
Always remember to engage the services of your attorney before entering into an agreement, failure to consult may prove to be expensive in the long run.
LEGAL DISCLAIMER: The material contained in this post is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis. They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the post. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.
*Arthur Marara is a corporate law attorney practicing law in Harare, Zimbabwe. He is also a notary public and conveyancer. He is also passionate about employment law, commercial law, family law and promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara) or WhatsApp him on +263780055152 or email [email protected].
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