When is a deposit refundable under a business sale agreement?

Posted on July 10th, 2017

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The case of Sarker Trading Pty Ltd v Vanage Pty Limited [2016] NSWDC 250 recently addressed the issue of deposits and whether or not a deposit can be forfeited under a Business Sale Agreement where the Agreement is rescinded.

The facts of the case are:

  • Sarker, as purchaser, entered into a Business Sale Agreement with Vanage for the purchase of a Subway Franchise in Forestway NSW for $95,000.00 (“the Agreement“).
  • The Agreement provided that it was a condition precedent to completion that Sarker be approved as a Franchisee of Subway.
  • Sarker paid an initial deposit of $10,000 (10.5%) and a further “Security Deposit” of $75,000.00.
  • Sarker failed the relevant “Skills Test” performed by Subway required to be approved as a Franchise.
  • Sarker sought to rescind the Agreement for an inability to satisfy a condition precedent to completion.
  • Vanage asserted it was entitled to retain the deposit and the Security Deposit.

 

P Taylor SC DCJ confirmed that under an executory contract for the sale of property, in this case a Subway business, a seller is generally not entitled to retain any part of the price received and also retain the property to be transferred. Entitlement to retain the money paid is conditional upon the completion of the contract (McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 477).

Vengae would only be entitled to retain the money paid if it was entitled to hold it as against damages it suffered by reason of Sarker’s breach of contract or because the money paid was a deposit. A deposit is an earnest of performance and as Santow JA explained in Havyn Pty Ltd v Webster [2005] NSWCA 182 at [131]-[132], a deposit can be retained by a vendor in circumstances of breach (in the absence of an express provision) except if forfeiture of the deposit is penal.

In the current proceedings the Court found that a breach of the Agreement could not arise because the Agreement was rescinded (validly) by Sarker for non-fulfilment of a condition precedent and not terminated by Venage for breach. The whole of the monies were order to be refunded to Sarker.

Lachlan Page, Solicitor at Mullane & Lindsay Solicitors, NewcastleLachlan Page is a Solicitor at Mullane & Lindsay Solicitors and practices extensively in commercial, business and property transactions and adviceIf you require any assistance in this area please contact Lachlan Page to arrange a consultation or contact our Newcastle office.

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