Articles

Applications to the Court by vendors and purchasers for a summary determination of disputed issues or an order that a deposit be repaid to the purchaser

Summary:

•  Section 49 of the 1925 Act is a deceptively short section which does two important things: first, it enables parties to a contract for a sale of land to have any dispute which arises between exchange and completion (other than as to the existence or validity of the contract itself) determined by means of a summary procedure (a ‘vendor and purchaser summons’) and, secondly, it gives the Court jurisdiction to determine whether a deposit paid to, and subsequently forfeited by, a vendor should be returned to the purchaser.

•  Section 49(1) is a useful tool in the practitioner’s toolbox. There are any number of issues that can arise between exchange and completion (e.g. about the vendor’s title, the validity of a notice to complete and requisitions) and the section 49(1) jurisdiction enables parties to have them determined quickly, at single hearing, rather than proceeding to a full trial.  

•  But section 49(1) seems to have been slightly lost sight of by modern practitioners and is seemingly being underutilised. The authors consider that the section 49(1) jurisdiction merits bespoke treatment in the CPR; doing so, would both serve as a reminder to practitioners of the existence of the jurisdiction and a guide to the procedure to be followed when it is invoked.

•  The jurisdiction in section 49(2) is important, particularly where the deposit does not exceed the conventional 10% of the contract price and will not therefore be recoverable as a penalty.  It is not a purchaser’s panacea: to secure the return of the deposit, a purchaser must point to something special or exceptional to justify overriding the ordinary contractual expectations of the parties that a deposit is not refundable.

• Although there are not many recent reported decisions in which a claim for a section 49(2) order has succeeded, the jurisdiction remains a valuable one. It enables the Court to order the return of a deposit where a vendor’s claim for specific performance fails (e.g. because of a defect in the vendor’s title). A purchaser may also succeed under section 49(2) if he or she can point to some form of trickiness or culpable delay on the part of the vendor which has caused the purchaser to be in breach. Similarly, a near miss in terms of contractual performance coupled with an unreasonable refusal by the vendor to accept an offer of something that is equivalent to performance of the contract could pave the way for a successful section 49(2) order.

Vendor and Purchaser Summons – Section 49(1)

Sub-section (1) was not a new provision in 1925. It replicates, almost word for word, the provisions of the Vendor and Purchaser Act 1874 section 9 – save that the former was limited to contracts for the purchase of a real or leasehold estate in England, whereas the LPA applies in Wales too – and to a contract for any interest in land.

Section 49(1) provides: “A vendor or purchaser of any interest in land, or their representatives respectively, may apply in a summary way to the court, in respect of any requisitions or objections, or any claim for compensation, or any other question arising out of or connected with the contract (not being a question affecting the existence or validity of the contract), and the court may make such order upon the application as to the court may appear just, and may order how and by whom all or any of the costs of and incident to the application are to be borne and paid.”

The ‘vendor and purchaser’ procedure in section 49(1) is available to resolve questions of fact and/or law and is specifically designed to enable speedy resolution of questions that arise between exchange of contracts and completion. Examples of such questions include: whether a valid requisition has been raised or properly answered, the validity of a notice to complete, whether the vendor had shown good title, and whether a contractual allowance is due as a result of some misdescription (and if so how much). The only matters which are excluded from the ambit of the jurisdiction under section 49(1) are questions concerning the existence or validity of the contract itself.

Although the primary means by which the Court resolves an issue raised by a vendor and purchaser summons is the grant of appropriate declaratory relief, it can order payment of compensation or the return of a deposit by a defaulting vendor or make such other order as “would be just, as the natural consequence of what [the court has] decided”: see Re Hargreaves & Thompson’s Contract (1886) 32 Ch D 454.[1]

However, by 1970, the procedure was so infrequently used that a Practice Direction was issued cancelling an earlier practice direction which provided a specially expedited procedure: [1970] 1 All ER 671. In 2001, in an article in the Conveyancer and Property Lawyer,[2] Gerwyn Ll. H. Griffiths said that the procedure was regarded as “of little or no significance or utility”, positing that a key reason for this was the reduction in title disputes since the advent of land registration and the other reforms introduced to simplify title in 1925.

One of the authors can recall colleagues expressing similar views in 2008 or 2009 about the wisdom of attempting to rely on the vendor and purchaser summons procedure: those views were considered and ignored, the summons was issued and an order was duly made. From memory, the Order was to determine how much allowance against the purchase price should be made for a misdescription, and the order was obtained on the first return date, within a matter of days of issuing the “summons”.

Although the pre-CPR term “summons” has been retained since the advent of the CPR, a section 49(1) vendor and purchaser summons is now brought by the issue of a CPR Part 8 Claim Form, supported by a witness statement, and an application notice. The time sensitive nature of the claim will generally justify the application being brought as an “urgent application” (see Chancery Guide, Chapt. 15) and it will come on for a hearing in the Judge’s Applications List (if the time estimate is not more than two hours) or be listed for a hearing before a High Court Judge listed by Judge’s Listing (if the time estimate exceeds two hours). The hearing of the application will generally be treated as the trial of the action: see, e.g., Walia v Michael Naughton Ltd [1985] 1 WLR 1115 at 1116H.

It is hard to know how often the section 49(1) procedure is being used since applications heard in the Judge’s Applications List are rarely reported. However, the authors believe that it is being underutilised.

But, there is one relatively recent written judgment on a vendor and purchaser summons – N3 Living Ltd v Burgess Property Investments Ltd [2020] EWHC 1711 (Ch) – which shows that the procedure is still alive and well and useful in some cases.  In that case, a vendor and purchaser summons was issued as a means of obtaining a speedy determination of whether a sole vendor’s proposed appointment of an additional trustee, to ensure that a beneficial interest in the subject property held by a third party would be overreached, would indeed have that effect.

As it happens, the sting was taken out of the substantive application because the parties adopted a suggestion, made by Morgan J at the start of the hearing, that the vendor and the new trustee would give an undertaking to hold the proceeds of sale to abide the outcome of any claim which the third party might later make and the arguments about the efficacy of the overreaching scheme only mattered on the question of costs. But N3 Living is a timely reminder of the role that section 49(1) can play in helping to resolve pre-completion disputes without having to postpone the completion date.

Readers may be interested to note that the proceedings in N3 Living were issued on 19 May 2020, and a full hearing occurred on 29 May 2020, just 10 days later.  Although the parties had to wait for a written judgment in that case, in other cases (where the urgency has not gone away) the Court is likely provide an ex tempore judgment – so this procedure is certainly one which a client in a hurry will want to consider.

The fact that the section 49(1) jurisdiction does not appear to be utilised to resolve the many and varied disputes which can, and do, spring up between contract and completion is seemingly down to the fact that the jurisdiction is not well known and even experienced practitioners overlook its availability when problems of this sort arise in practice.  It occurs to the authors that the section 49(1) jurisdiction would benefit from bespoke treatment in the Civil Procedure Rules or a Practice Direction. This would both serve as a reminder to practitioners of the existence and scope of the jurisdiction and provide guidance, which is currently only available through a careful reading of the authorities on section 49(1), on the proper procedural approach to be followed when issuing and prosecuting a vendor and purchaser summons.

Repayment of Deposits – Section 49(2)

A deposit, typically 10% of the purchase price, is an almost invariable feature of a contract for the sale of freehold or leasehold land. Little thought is often given to it when it is paid over, but if the contract cannot ultimately be performed, whether the vendor is entitled to retain the deposit is a matter of enormous importance to the parties.

Leaving aside the rare case of frustration, a contract for the sale of land will come to an end because one party or the other defaults and the innocent parties exercises a right to terminate the contract.

The position is generally straight-forward if the vendor has defaulted: the purchaser will be entitled to the deposit back: see Country and Metropolitan Homes Surrey Ltd v Topclaim Ltd [1996] Ch. 307 at 315–316 and Aribisala v St James Homes (Grosvenor Dock) [2008] EWHC 456 per Floyd J at [13].

The position is more nuanced where it is the purchaser who has defaulted. Deposits that exceed the conventional 10% of the contract price are subject to penalty rules: Cavendish Square Holding BV v Makdessi [2015] UKSC 67. In such cases, the deposit will be valid if, and only if, the vendor can show that it was reasonable to demand it; failing that, the whole deposit is invalid and must be repaid, subject to a cross-claim for any loss suffered by the vendor as a result of the purchaser’s breach: Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] 1 AC 573.

But, as the Privy Council confirmed in Dojap Investments, a deposit of 10% or less is considered an “earnest for performance”; it is not subject to penalty rules and, absent a jurisdiction of the kind found in section 49(2) (of which there was no equivalent in Jamaica) the Court has no jurisdiction to order it to be returned to the purchaser.

The fact that the Court did not enjoy a general discretion to order the repayment of a deposit provided under a contract for the sale of land had been established in the pre-1925 case law in England too. In Howe v Smith (1884) 27 Ch.D. 89, the Court of Appeal held that a purchaser who had paid a substantial deposit, but failed to the pay the balance, had no legal or equitable right to recover his deposit, in the absence of any contractual right to do so, and declined to order its return. In Re Scott & Alvarez’s Contract; Scott v Alvarez [1895] 2 Ch 603, the Court concluded that it could not order the return of a deposit to a purchaser even though the vendor was found not to be entitled to an order for specific performance against the purchaser (because of a defect in her title).

The immediate purpose of section 49(2) of the 1925 Act was to reverse that position.[3] The subsection provides: “Where the court refuses to grant specific performance of a contract, or in any action for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit.”The advantage of section 49(2) is that it gives the Court flexibility to determine whether to order a deposit to be repaid, even where the penalty rules do not supply the answer to the question. But it should be kept in mind that section 49(2) is an “all or nothing” jurisdiction: the Court must decide whether or not to order the return of the whole deposit; it does not have power to order the return of part only of the deposit: James Macara Ltd v Barclay [1944] 2 All E.R. 31, at p32 per Vaisey J (affirmed on other grounds at [1945] K.B. 148). But it seems that it is open to the Court to give an indication that it would only be prepared to order the return of the deposit if the purchaser submits to a deduction from it where the justice of the case requires (Dimsdale Developments v De Haan (1983) P&CR 1). It is not possible to contract out of the jurisdiction in section 49(2) (Aribisala v St James Homes (Grosvenor Dock) Ltd [2007] EWHC 1694).

The Section 49(2) Jurisprudence

So, how have the Courts in fact used that flexibility? It has taken some time for the Court to get a firm grip on the ambit of the discretion under section 49(2) and, even 50 years on from its enactment, the cases did not speak with one voice. 

In Michael Richards Properties Ltd v Corp of Wardens of St Saviour’s Parish [1975] 3 All E.R. 416, at 424, Lord Goff suggested that section 49(2) “… was passed to remove the former hardship which existed where a defendant had a good defence in equity to a claim for specific performance but no defence in law, and, therefore, the deposit was forfeited” but that “outside that ambit [the jurisdiction] should only be exercised, if at all, sparingly and with caution.”  By contrast, in Schindler v Pigault (1975) 119 S.J. 273, Megarry J expressed surprise that in “its 50 years of life, this section has remained remarkably quiescent”; he concluded that the jurisdiction to order the return of a deposit was available “when justice required it”; it was not confined to cases where the other party’s conduct had been unconscionable but “was exercisable on wider grounds, including a general consideration of the conduct of the parties, the gravity of the matters in question and the amount at stake”.

Although in subsequent decisions the courts tended to align themselves with Megarry J’s broader view of the jurisdiction, more recent decisions have dispelled any suggestion that section 49(2) gives the Court a general roving discretion to require a deposit to be returned. In Omar v El-Wakil [2001] EWCA Civ 1090, the Court of Appeal said the Court should start from “the position that the deposit should not normally be ordered to be repaid” to a defaulting purchaser and that, when the Court is asked to exercise its discretion under section 49(2), “the search is for something more”,  namely “something special or exceptional to justify overriding the ordinary contractual expectations of the parties” (per Arden LJ).

So, what would satisfy the requirement for “special or exceptional circumstances”?  Although, on the facts, the section 49(2) claim failed in Aribisala v St James Homes (Grosvenor Dock) Ltd [2007] EWHC 1694, Floyd J said this about the jurisdiction: “I think what needs to be looked at is how close the purchaser came to performing the contract, what alternatives he was able to propose to the vendor and how advantageous they would be compared with actual performance of the contractual terms.” In Solid Rock Investments UK Ltd v Reddy [2016] EWHC 3043, Henry Carr J said he would add a further consideration to those outlined by Floyd J in Aribisala: “whether the vendor has caused or contributed to the failure to perform the contract, for example, by delays in answering the purchaser's questions or delays in providing relevant details.”

But the decision itself in Reddy illustrates the relatively high bar represented by the requirement for “special or exceptional circumstances” in section 49(2). In that case, the purchaser would have been able to complete the day after the expiry of the notice to complete, but the vendors beat it to the punch and rescinded the contract; by virtue of a planning permission granted 10 days later, they resold at a substantially higher price. Despite the apparent harshness of that result the Court declined to exercise its discretion under section 49(2).  The venders had merely “acted in a commercially astute fashion” and the purchaser had been unwise to disregard offers to postpone the completion date for a comparatively small increase in price.

It is, in fact, quite difficult to find cases where the Court has ordered the return of a 10% deposit to a defaulting purchaser.  One case where the purchaser was successful was Tennaro v Majorarch Ltd [2003] EWHC 2601, where Neuberger J considered that the fact that the value of the property had risen since the date of the contract was a reason to order the return of the deposit to the purchaser.  But, subsequent cases, including the Court of Appeal case of Midill (97PL) Ltd v Park Lane Estates Ltd [2008] EWCA Civ 1227 have made clear that this alone is not sufficient to justify the return of the deposit. 

Although, in recent times, there have been very few decisions in which claims for section 49(2) orders have succeeded, the authors would suggest that there is life in the jurisdiction yet. There is undoubtedly still scope for it to be successfully invoked in the scenario specifically mentioned in the sub-section: where the vendor’s claim for specific performance fails and the purchaser does not have a right, at law, to rescind the contract.

Outside that context, the jurisdiction is more miserly because, by themselves, neither the apparent harshness of the result (Omar v El-Wakil), nor the elimination of the vendor’s loss through a subsequent increase in the value of the property (Reddy and Midill) is likely to avail a purchaser under section 49(2). But the authorities show that the conduct of the parties during the period in which the contract is on foot is important and, in an appropriate case, it may justify an order for the return of the deposit. In Midill, the Court of Appeal did not cast doubt on the suggestion made by Walton J in Universal Corpn v Five Ways Properties Ltd [1978] 3 All ER 1131 that a section 49(2) order may be made where the vendor has been party to some conduct which was “tricky” or “not straightforward”, or had “some other mark of equitable disfavour attached to it”.[4] So if, on the facts, the vendor has behaved badly or (per Henry Carr J in Reddy) has “caused or contributed to the [purchaser’s] failure to perform the contract” (e.g. by being slow to respond to legitimate requests), a purchaser might then succeed under section 49(2).

Similarly, if the purchaser has only narrowly missed out on contractual performance and the vendor has unreasonably refused an offer of something that is equivalent performance of the contract, a section 49(2) order may be made: see Aribisala and Reddy. Although in Midill, the Court of Appeal poured cold water on the idea that an increase in the value of the property would bring section 49(2) into play, it notably said that the outcome in the second of the three cases determined by Neuberger J in Tennaro could be justified on conduct grounds. In that case, the benefit of the contract had been assigned to a third party, whose offer to purchase the property at a substantially higher price than had been agreed with the purchaser and at about the time that the contract with the purchaser would have been completed, had been rejected by the vendor, without explanation. The Court of Appeal said that Neuberger J had been right to make a section 49(2) order in that case given “the relative attractiveness of the alternative offer available to the vendor at the time of intended completion, arranged by the purchaser, and the lack of any stated reason for rejecting it”. 

So, although by no means a defaulting purchaser’s panacea, if a purchaser can point to some tricky or unreasonable conduct on the part of the vendor, a section 49(2) claim may yet succeed. Even if there is only a hint of that on the facts, the threat of a section 49(2) claim may be a useful lever for those acting for purchasers to pull with a view to achieving some form of sensible compromise.