RETENTION OF FUNDS IN THE EVENT OF BREACH

RETENTION OF FUNDS IN THE EVENT OF BREACH
 
There are many offers to purchase which contain a breach clause stating that:  If there is contractual breach by the Purchaser, which is not rectified within a specific time period, the Seller can cancel such agreement and retain all amounts paid by the Purchaser in respect of the purchase in the form of a penalty/rouwkoop.
 
The above is not as straight forward and various matters have gone to court and had a similar outcome.
 
In Mathews v Pretorius (1984) (3) SA547W) read with the Conventional Penalties Act (Act 15 of 1962) hereinafter referred to as “the Act” any penalty or liquidated damages contained in a contractual obligation shall be subject to the provisions of the Act.  This case refers to section 3 of the Penalties Act which states:

“If upon the hearing of a claim for a penalty, it appears to a court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extend as it may consider equitable under the circumstances:  Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor’s proprietary interest, but any other rightful interest that may be effected by the act or omission in question.”

 
Forfeiture is also covered by the Penalties Act and comes into effect in the event of a withdrawal from an agreement, this means that the Act applies to a non-refundable deposit and retention of monies paid by a purchaser as liquidated damages. 
 
When the Court looks at the Conventional Penalties Act the calculation for damages will be determined by the said court.  A Reduction of the penalty “to such extent as it may consider equitable under the circumstances” May be applied by the said court.  This means that there can be a substantial difference between the penalty and the damages suffered. 
 
In the 2015 case of Tshikala and Another v Myburgh and Another (1215/12) [2015] the court confirmed again that in terms of the Penalties Act the deposit may not be retained which highlights the point that the right to retain monies should be determined by a Court and that you cannot merely rely on stipulations in the offer to purchase.  The alternative to this point will be for both parties to settle this matter internally and reduce the settlement in writing. 
 
In practise estate agents and conveyancers are to be careful in creating unreasonable expectations that in the event of breach one party will automatically be entitled to retain funds by relying on the breach clause.  The dispute must be heard by a court and the findings of the said court will determine the way forward which prevents any party from acting as a decision maker purely based on the contents of the offer to purchase.  
 
The conclusion reached is that if no settlement can be reached between the parties in the event of a dispute, the Penalties Act states that the matter must be referred to court to preside over.   

Article by: Lexis