The fate of your deposit hinges on the responsible party.

It’s every homebuyer’s worst nightmare: you discover your dream home, your offer gets accepted, and you pay a deposit, only to have the sale collapse before the property is transferred to your name. The crucial question now is, what happens to your hard-earned deposit?

The answer depends on the terms outlined in the purchase agreement and the reasons behind the cancellation. Moreover, it largely depends on which party is accountable for the failed sale.

If you, as the buyer, breach the contract and cannot rectify the breach within a specified timeframe, you may risk losing your deposit. In such cases, the seller has the right to use the deposit to cover any damages resulting from the transaction falling through, such as legal costs or agent’s commission.

Under property law, various factors can constitute a breach of contract by the buyer, with the most common being the buyer withdrawing after signing an Offer to Purchase (OTP).

What qualifies as a buyer’s breach of contract?

While the sale of land in South Africa must adhere to the Alienation of Land Act and be in writing, purchasing a home primarily involves a contractual agreement.

The contract should clearly outline all conditions that are significant to the sale, leaving no room for ambiguity. This can encompass aspects like the date of occupation, the inclusion of occupational rent, the functionality of the pool pump, or the retention of a retractable washing line.

The OTP or Sales Agreement usually includes “suspensive conditions,” which are specific requirements that must be met for the contract to be enforceable. The most common condition is typically the need for approved home financing.

Once all parties involved in the property transfer sign the OTP or Sales Agreement, it becomes legally binding, and both the buyer and the seller are obliged to fulfill their respective obligations.

Consequently, if the buyer withdraws after signing, significant penalties may be imposed, including the loss of the deposit. However, if the sale falls through due to unmet suspensive conditions, the contract becomes void and the buyer is entitled to the refund of their deposit.

Examples of suspensive conditions include the buyer’s requirement to conduct a timely home inspection and be satisfied with the results, such as assessing the roof structure.

Among the most common suspensive conditions are the buyer’s need to secure financing (a home loan) and the prerequisite that the buyer’s existing property be sold first, often referred to as a “subject to” sale.

Another scenario involves the seller breaching the contract, such as by violating a warranty. In such cases, cancellation may not be the sole recourse for the homebuyer. If the buyer can cancel the agreement due to the seller’s breach, they are entitled to a full refund of their deposit.

Other factors can cause a sale to fall through, and these circumstances determine the fate of the deposit.

Instances where the buyer may forfeit the deposit:

  1. Deliberate withdrawal of the home loan application: Regardless of loan approval, withdrawing the application breaches the contract if a home loan is necessary for financing the purchase.
  2. Buyer’s remorse: If the buyer withdraws after signing without a legally justifiable reason.
  3. Failure to meet suspensive conditions: While these conditions protect the buyer, failing to make an effort to fulfill them results in deposit forfeiture. For example, if the purchase is contingent upon selling the buyer’s existing home, they must demonstrate genuine efforts to market it.

Instances where the deposit is refunded to the homebuyer if the sale falls through:

  1. Failure to secure funding: If the OTP is subject to securing financing and the home loan application is denied, the deposit will be refunded.
  2. Seller’s breach of contract: If the seller breaches the contract, and the buyer cancels as a consequence, the buyer is entitled to a full refund of their deposit.
  3. Title deed and legal issues: If the transaction fails due to outstanding payments owed by the seller or title deed disputes related to the property, the seller is in breach and the buyer will have their deposit returned.

Although the vast majority of home sales are successful, it is crucial to acknowledge the possibility of a sale falling through. Both buyers and sellers should be aware of this risk when entering into a property transaction.

The deposit, which is typically held by a conveyancing attorney or estate agent, serves as evidence of the buyer’s commitment to the home purchase and assurance to the seller regarding the buyer’s intention to honour the OTP agreement.

If the sale fails and the buyer is not at fault (for instance, due to an unmet condition), the buyer should have complete confidence that the deposit will be promptly returned to them, along with any accrued interest.

It is highly recommended that buyers seek legal advice when including suspensive conditions, as they serve to protect the buyer and ensure their readiness for full commitment. Properly incorporating these conditions can safeguard the deposit.