Understanding your rights: Breach and penalty clauses in property agreements

When buying immovable property, the offer to purchase serves as an agreement between buyer and seller. Within this document, certain clauses demand meticulous attention from both parties. These clauses outline the rights, obligations, and procedures that govern the transaction. Understanding these key provisions is essential for ensuring that the interests of both the buyer and seller are protected and that the purchase process proceeds smoothly and transparently.

Breach of contract clause:

Once the offer to purchase is signed by both parties, it is a valid contract. The relationship between the seller and purchaser is governed by the law of contract. A standard clause in the offer to purchase is a breach of contract clause. This breach occurs when either party, without a lawful reason, fails to honour their obligation under the contract.

In this event, the aggrieved party, depending on the wording of the breach clause, will have to allow the defaulting party to remedy the breach. Should they fail to comply, the aggrieved party typically has the option to either cancel the contract and seek damages or to file a court application for specific performance. This means they can demand the enforcement of the contract, requiring the defaulting party to proceed with the transfer as agreed. If the aggrieved party elects to cancel and claim damages, it is at this stage that they must take into consideration the Conventional Penalties Act 15 of 1962 (the Act), when quantifying the damages to be paid by the defaulting party.

The following paragraph deals further in detail with the claim for damages.

Forfeiture clause (penalty) or non-refundable clause:
It’s a misconception that the seller is entitled to the deposit, held in the conveyancer’s trust account, in the event of the purchaser breaching the contract. The forfeiture (penalty) clause might create the impression to the seller that should the contract be cancelled due to a breach by the purchaser, the seller will be entitled to the deposit paid or any monies paid into the conveyancer’s trust account.

However, after the cancellation of the contract, the seller will not be automatically entitled to retain all the amounts as a claim for damages or as a non-refundable deposit.

In terms of clause 3 of the Act:

“if upon hearing of a claim of penalties, it appears to the 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 penalty was stipulated, the court may reduce the penalty to such an extent as it may consider equitable in the circumstances…”

The case of Matthews vs Pretorius (1984) (3) (SA547W), deals with a penalty clause. If the amount being claimed for damages is out of proportion to the detriment of the guilty party, the court may reduce the penalty to such an extent as it may consider equitable under the circumstances, taking in due consideration the interests of all concerned.

Estate agents should be wary of creating the expectation to the seller that they will be entitled to the non-refundable deposit, or any monies paid to the conveyancer or estate agent, should the contract be cancelled due to a breach by the purchaser.

Conveyancers do not have the authority to be judge and jury when dealing with the monies in their trust account. If there is a dispute between the parties regarding the refund of any monies due to breach and cancellation of the contract, the conveyancer should be guided either by an agreement between the parties or a court order made on how the monies are to be distributed.

Rouwkoop clause:

Occasionally, an offer to purchase may include a rouwkoop clause, which must be clearly differentiated from the forfeiture (penalty) clause. Rouwkoop is a common law concept and in its simplest form means “regret purchase”.  The rouwkoop clause in an offer to purchase affords a party to the contract to pay a sum of money if they wish to withdraw from the contract. The parties would have agreed on a fair and reasonable amount payable, which is considered rouwkoop.

The primary distinction between the forfeiture (penalty) clause and the rouwkoop clause lies in the fact that the latter does not require the party wishing to withdraw from the contract to be in breach of it.

Unfortunately, there is confusion as to the interpretation between monies paid in respect of penalties and rouwkoop. It is therefore important to have a clear understanding of the difference between the forfeiture (penalty) clause and the rouwkoop clause, to avoid unnecessary litigation.

Reference List:

1. Conventional Penalties Act 15 of 1962
2. Matthews vs Pretorius (1984) (3) (SA547W)

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.

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