©The
Star (Used by permission)
by Bhag Singh
Uncle borrows RM50,000 from nephew to buy land with option to buy back nephew's
share. But after 5 years...
ON many occasions agreements are entered into in the spirit of goodwill and
friendly relations. Such transactions may even be properly documented. With the
passage of time, differences sometimes develop in such relationships. When this
happens, the spirit of the arrangement is likely to be ignored and the
technicalities relied upon.
Such was the case with a reader who wanted to buy a piece of land several years
ago, but was short of funds. His nephew helped out by giving him an advance of
RM50,000. The arrangement was then structured as a sale of half of the property
to the nephew, with an option for the uncle to buy back within five years and
not later than six years.
It was provided that the price of the buyback would be RM50,000 and that the
uncle could buy the property by giving notice to that effect besides paying a
deposit of RM5,000 pending completion of the transfer.
It was clearly stated in the agreement that during this period, the nephew would
collect the rental in respect of his half of the property, but should the uncle
buy back the property, he would reimburse the nephew for all out–of–pocket
expenses incurred by him and payments made by way of rates, repairs, assessment,
taxes and the like.
When the five years came to an end, the uncle, who now had the money to pay back
the nephew and buy back the land, gave notice to exercise the option in the
agreed form. However, the deposit was not enclosed. Solicitors of both parties
overlooked the need to pay the deposit and even agreed for the uncle to pay the
amount due within a further extended time.
However, in the interim period the nephew's new solicitors realised that the
deposit had not been paid and advised their client that he was not obliged to
sell the property to the uncle after all. The uncle now wants to know if,
because of his oversight to pay the deposit, he has lost his right to recover
the land at the agreed price, which has since appreciated greatly.
The answer to this question depends on numerous factors as well as an
examination and interpretation of the precise terms of the agreement. It also
involves a consideration of the purpose of the deposit and the implications of
its payment or non–payment.
The question that now arises is: does non–payment of the agreed deposit by one
party mean that the other party is released from its obligations under the
agreement? In this case, does it mean that the nephew can refuse to sell the
land to the uncle?
When such a situation arises, what has to be considered is whether the payment
of the deposit is a condition precedent for the entry into, and existence of, an
agreement. Or if it is not a condition precedent, is it such a fundamental term
that its non–payment can result in nullifying the agreement and releasing the
seller from the obligations undertaken.
This will largely depend on the manner in which the agreement is formulated.
As has been stated in a note in The Conveyancer and Property Lawyer many years
ago under "Bouncing deposits", the authorities find it difficult to reconcile
the consequences of non–payment of a deposit required to be paid by a contract
for the sale of land. In analysing the case, Goulding J. in Myton Ltd v
Schwab–Morris went on to rationalise the need for deposits.
However, it all depends on whether the payment of a deposit is a condition
precedent for the sale. This must be clearly stated. If it is not expressly
stated, the only basis on which to treat the non–payment of the deposit as
constituting a breach, based on which the seller could resile from the sale,
would be that it constitutes a fundamental term.
In some cases, the courts have drawn a distinction between a case where the sale
is through an auction and private treaty.
The view taken is that where the sale is through an auction, the requirement for
payment of deposit is clearly stipulated and serves as a protection against
eventual default based on the obligation to complete the transaction. It is not
a mere instalment, it is intended to be an earnest for the purchase to be
completed.
However, the other view is that in a contract for the sale of land, where a
deposit to be paid by the purchaser does not constitute a condition precedent,
failure to fulfil payment of the deposit, which prevents the contract from
coming into existence, would entitle the vendor, if he so elects, to sue for
damages, including the amount of the unpaid deposit.
However, in deciding whether such a term is a fundamental term, the surrounding
circumstances have to be looked at. Yet another aspect is that when time has
been fixed for the payment of a deposit but there has been non–compliance with
the need to pay the deposit at a particular time, and the parties go on with the
transaction, it would also have the effect of waiving the right to require
payment of the deposit at a specific time. In a manner of speaking this sets
time at large as compared to time being of the essence.
This mean that unless a new time–frame is established in such circumstances
within which the deposit required to be paid is paid, and unless this time–frame
is observed, the person defaulting cannot be held to be in default to justify
bringing the contract to an end.
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Terms of agreement
14 Oct 2008 12:00 am