Landmark Singapore High Court decision on developer’s power of forfeiture of deposits under Law Society Conditions of Sale 2012: Allen & Gledhill

10 October 2023

Li Jialin & Anor v Wingcrown Investment Pte Ltd [2023] SGHC 256

In the recent decision of Li Jialin & Anor v Wingcrown Investment Pte Ltd, the Singapore High Court considered the issue of whether a developer would be allowed to retain “any” smaller part of a larger deposit that the purchaser had paid. This is the first reported decision in Singapore on the scope of the developer’s power to forfeit “any” deposit under the Law Society of Singapore’s Conditions of Sale 2012 (“Law Society Conditions”). The case is significant given the wide usage of the Law Society Conditions in property transactions in Singapore.

Allen & Gledhill Partner Tay Yong Seng represented Wingcrown Investment Pte Ltd (“Company”), a unit of Wing Tai Holdings, in successfully defending the developer’s exercise of its powers of forfeiture under the Law Society Conditions.

Background

The Company was the developer and vendor of a residential development that included a property (“Property”) which Li Jialin and Li Suinan (“Purchasers”) made two abortive attempts to purchase.

In 2015, the Company issued an option to purchase to the Purchasers in respect of the Property (“OTP 1”). Pursuant to OTP 1, a 5% booking fee of S$89,250 was paid by the Purchasers to the Company to purchase the Property at the purchase price of S$1,785,000 (“2015 Purchase Price”). The Company and the Purchasers then entered into a Sale and Purchase Agreement in respect of the Property (“SPA 1”). SPA 1 provided that in the event SPA 1 was annulled, the Company could forfeit and keep 20% of the 2015 Purchase Price (amounting to S$357,000) from the instalments previously paid by the Purchasers.

Owing to the Purchasers’ default in payment, SPA 1 was annulled in March 2018. By then, S$1,217,550 had been paid by the Purchasers to the Company. At the Purchasers’ request, the Company did not forfeit any sums under SPA 1 but, instead, issued a new option to purchase in April 2018 (“OTP 2”) which was duly exercised by the Purchasers. Under the terms of OTP 2:

In consideration of the new option fee of S$357,000, the Company agreed to sell the Property to the Purchasers at the new purchase price of S$1,900,000 (“2018 Purchase Price”).
The Purchasers paid a sum of S$1,195,354.42 to the Company as a deposit under the terms of OTP 2 (“Deposit”). The Deposit amounted to approximately 63% of the 2018 Purchase Price. OTP 2 additionally provided that the Deposit “shall form part of the 2018 Purchase Price”.

Clause 2.1 of OTP 2 incorporated the Law Society Conditions. Condition 15.9(c) of the Law Society Conditions provides that if “the Purchaser does not comply with the terms of any effective Notice to Complete served by the Vendor under this Condition, then … without prejudice to any other rights or remedies available to him at law or in equity, the Vendor may … (i) forfeit and keep any deposit paid by the Purchaser”. The Company issued a notice under Condition 15.9 to the Purchasers to complete their purchase of the Property in October 2018. The Purchasers failed to do so. Subsequently, the Company terminated the transaction in OTP 2 and eventually sold the Property to another purchaser.

In March 2023, the Company forfeited 20% of the 2018 Purchase Price amounting to S$380,000 and retained a sum of S$326,243.07 for the fees and expenses incurred in the lead-up to the eventual sale of the Property (“Fees and Expenses”).

Interpreting the forfeiture of deposit clause

The Purchasers claimed the return of the entire Deposit amounting to 63% of the 2018 Purchaser Price. They argued that no part of the Deposit should be forfeited because it was not a true deposit and operated as a penalty. Their arguments included the following:

The Deposit was extortionate and far in excess of the standard customary rate for deposits in such transactions, which was 20% of the purchase price.
The Deposit of 63% in OTP 2 was contrary to the parties’ prior dealings.
Condition 15.9(c)(i) only allowed the Company to forfeit the entire quantum of “deposit” as defined in OTP 2 (63% of the 2018 Purchase Price), and not “any” smaller part of it (whether 20% of the 2018 Purchase Price or any other part of the Deposit).

The Singapore High Court rejected all the Purchasers’ arguments and identified the issue as being whether, on a proper construction of Condition 15.9(c)(i), the Company was entitled to forfeit such sum which it considered reasonable as a true deposit, namely 20% of the purchase price.

The court first found that the phrase “any deposit” supported an interpretation of Condition 15.9(c)(i) that entitled the Company the discretion to forfeit a smaller part of the sum that was designated as a “deposit” in OTP 2. The language used was wide enough to allow the Company to choose to forfeit the sum of S$380,000, being part of the S$1,195,354.42 that had been designated as a “deposit”.

The court found that the Purchasers’ argument that the Company was only allowed to forfeit the entire quantum of “deposit” as defined in OTP 2 would allow a defaulting purchaser to avoid the agreed upon consequences of their breach by relying upon their own wrongful conduct, defeating the purpose of a deposit as a security for performance.

The court also rejected the Purchasers’ argument that that the power of forfeiture under the Law Society Conditions was limited only to deposits which have been determined to be true deposits as a matter of law.

On the other hand, the court accepted the Company’s arguments that the sum of S$380,000 forfeited by the Company was a true deposit. This sum met the touchstone of reasonableness on the facts of the case. Further, the sum was not so large that it could not be objectively justified by what was reasonably necessary to serve effectively as earnest moneys.

The court also allowed the Company to retain the sum of S$326,243.07, pending the Company’s assessment of damages against the Purchasers for its Fees and Expenses.

Practical implications

Prior to this decision, there existed a lacuna in the reported cases as to whether a smaller part of a larger deposit could be forfeited by the developer when the purchaser defaults. This unusual and novel situation did not appear to have arisen for litigation. This uncertainty has now been resolved in favour of the developer.

In an appropriate context, the phrase “any” deposit would not render a forfeiture clause under the Law Society Conditions to be so broad as to be unenforceable. In this case, the Developer’s forfeiture of 20% of the 2018 Purchase Price, amounting to S$380,000, was upheld as the court found that the sum of money forfeited was a true deposit which fulfilled the touchstone of reasonableness. In addition, the Company successfully retained another sum of S$326,243.07 for its Fees and Expenses pending assessment of damages from the Purchasers’ breach.

Reference materials

The judgment is available on the Singapore Courts website www.judiciary.gov.sg.