In the real world, there are two kinds of deposits. In some cases, such as if you are renting a car or a property, you will be asked to pay a deposit as a means of covering the cost of damages that might occur whilst it is rented out. This is known as a ‘damage deposit’, and the money is returned at the end of the rental arrangement as long as there is no damage or other non-agreed costs incurred by the person renting it out. If you did not actually rent the property or item, this money will also be entirely refunded.
The other kind of deposit is a payment that is made, usually as part payment. This is usually money that is paid before you receive goods or services – such as a house, car or holiday, and in this instance, your ability to ask for your refund back depends on whether you have paid as an advance payment or as a deposit – which are slightly different concepts.
Advance payments, mere part-payments and deposits
When you intend to buy something, it may be the case that you are asked to ‘pay a deposit’. This normally means that you make an advance payment – pay some money beforehand to show that you are serious about buying it or to guarantee you will be buying it. This adds some security for both the buyer and the seller. This money will normally be deducted from the final payment once the goods or services have been delivered.
In the Sale of Goods Act 1979, there is no actual definition of deposits and the rules that surround them. This means that save for the parties agreeing a certain provision, the seller’s rights over the deposit is one of common law.
According to the case of Howe v Smith (1884) 27 Ch D 89, a deposit is defined as “a payment made to secure or guarantee a seller’s performance of the contract. It is considered ‘security for completion of the purchase’, and unconditional on the actual performance of the contract.”
A deposit, in a similar way to a part payment, makes up part of the whole purchase price and is not a guarantee of the seller’s fulfilment of the contract. This suggests that if the payment is made as a deposit (in this situation), the money will not be recoverable if the contract is not fulfilled by either party. However, if the money has been paid as a part payment, the seller will be able to keep the money that is equal to the amount of money that they have lost (this will not necessarily be the whole value of the money paid).
When is an advance payment a deposit?
The situation around when an advance payment is a deposit and when it is not (a mere part payment) can be confusing. It is important that you know where you stand when it comes to deposits so that you know what your rights are if you have put some money down in advance. It can be useful to check at the time in relation to the individual agreement.
The law stipulates that if a contract is described specifically as a ‘deposit’, but does not mention whether it is refundable or not, it will be assumed that it will be classed as a ‘deposit’. This means that if the buyer cancels the contract before it is carried out, the money will not be returned.
If, on the other hand, the contract does not categorise the advance payment as a ‘deposit’, and there is no other information detailing the return of the money or confirming that the payment is unconditional on the buyer’s performance, it will be classed as a ‘part payment’. This means that if the contract is not fulfilled, the money will be returned (subject to any losses the seller may be able to claim if the buyer has cancelled in breach of contract).
If a penalty is deducted, this must be of the value of the loss of the seller. The general rule against penalties is that if a clause is a penalty, it will not be enforced beyond the actual loss of the innocent party. However, if it is paid as a deposit, the amount does not have to be equal and can, in fact, be a lot more. Traditionally, a deposit has been viewed as being a commitment by the buyer that they will be buying a product or using the services of a seller and therefore, the money that is taken if the transaction does not take place does not need to equal the amount that is lost by the seller.
This does not mean that a seller can ask for a hugely disproportionate amount from the buyer.
If you are buying or selling a product or service that involves paying or collecting a deposit, it is essential that you define whether advance payments are refundable or non-refundable and the circumstances surrounding your payment.
Contact Waldrons solicitors
When it comes to property deposits, get in touch with one of our conveyancing solicitors today. Alternatively, if you would like some general advice on potential breach of contracts and whether you can keep or return a deposit, please contact one of our Litigation Solicitors.
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Last reviewed on 11/07/23 by Abigail Gray who is an Associate Solicitor