Non Refundable Deposits

The deposit paid when purchasing an immovable property

In Cyprus, the amount paid as a deposit for the purchase of an immovable property may or may not be refundable, as George Coucounis explains.

The intention of the parties in a sale agreement for the purchase of an immovable property at the time when an amount is paid, whether it is refundable or not, in the case one of the parties repudiates the agreement, is of paramount importance. The intention is ascertained from the contemplation of the parties made in the sale agreement, especially when the agreement is written.

Normally, the purchaser og a Cyprus property makes a payment either by way of a deposit to reserve the immovable property until the sale agreement is completed or an amount is paid on account of the purchase price. In such a case, if the sale is not completed, the deposit is refundable to the purchaser, unless the parties have agreed otherwise. On the other hand, if the amount is paid on account of the purchase price and nothing is stated in the agreement for the said amount, whether it will be refundable or not and the purchaser fails to proceed with the agreement and therefore it is terminated, the amount paid must be refunded to the purchaser, unless the vendor has suffered a loss or damage, which is deductible. However, when the amount is paid as a deposit for keeping or complying with the terms of the sale agreement in the sense of a guarantee, the amount is not refundable.

Of course, the said amount must be reasonable to cover the loss or damage contemplated by the parties at the time of the agreement so that it will no be considered as penal and be refundable.

The above issue is quite interesting regarding both the purchaser and the vendor due to the continuous increase of the price of immovable properties. Thus, the vendor by keeping the property will be in an advantageous position because of the increase of its price. To the contrary, the purchaser, who will not be in a position to pay the price, will lose the property and the deposit.

The issue was decided by the Court of Cyprus, following the common law in England. Particularly, the District Court of Larnaca in a case tried by Judge Mrs T. Karakana, referred to the common law which is applicable in Cyprus, according to which the deposit which is given as guarantee for complying with the terms of an agreement is not refundable, whereas the payment made on account of the purchase price is refundable, unless the agreement provides otherwise.

In England, in the case of sale of an immovable property, the above issue is regulated by article 49(2) of the Law of Property Act of 1925, which gives power to the Court, if it considers it just, to order the refund of the amount paid for the purchase of an immovable property in case the purchaser is in breach. Moreover, the lady Judge held that the English courts originally interpreted the said statutory provision strictly by ordering the refund of the deposit paid only when the vendor could not get an order for the specific performance of the agreement. However, the continuous increase in the price of immovable properties has led the courts to a broader approach and interpretation of the said provision, considering that a breach of the agreement by the purchaser could hardly cause any loss or damage to the vendor.

Thus, the English courts in the past few years adopt a broader view that the above provision is designed to “do justice between vendor and purchaser” and the discretion of the Court to be exercised where “justice requires it”.

In the case tried before the Court in Larnaca, a written sale agreement was signed between the parties according to which the vendor sold to the purchaser an apartment and received by way of a deposit the sum of CY£4000. The purchaser failed to pay the balance of the purchase price and the vendor terminated the sale agreement. There was no provision in the sale agreement regarding the deposit paid, whether it was refundable or not.

The Court referred to a similar case before the English Courts and stated that the English Court of Appeal held that it would not be fair for the vendor to forfeit the deposit, so it ordered its refund. There is no such legal provision in Cyprus but, as stated, the above are in compliance with the general principle that damages are calculated on the basis of the damage or loss the party has suffered and are not based on the profit the innocent party gained due to the breach of the contract.

The scope of compensation is not to put the innocent party who is not responsible for the termination of the agreement in a better financial position than he was at the time of the agreement. The manner the relevant provision was written in the sale agreement with regard to the price of the apartment and its payment was such that the sum of CY£4000 was paid as part of the price and not as a deposit for complying with the agreement.

Consequently, the Court ordered the refund of the aforesaid amount to the plaintiff - purchaser.