Buyers beware- pulling out can be costly

It used to be standard practice that when someone wants to buy a property, they would first pay 2% ernest deposit. After that, they would then sign the agreement and pay the balance 8% deposit upon signing. If the signing somehow doesn't take place, oftentimes the buyer loses his 2% deposit only.

That situation may have changed. In Invescor Sdn Bhd v Sobena Maju Sdn Bhd, one party paid RM200,000 earnest deposit for a RM15million joint venture. It then failed to proceed with the transaction.

The Court of Appeal held (on a majority decision) that a true deposit would constitute 10% of the transaction, and ordered the defaulting buyer to pay the balance of 10% deposit less the RM200,000 originally paid. In other words, the buyer who was willing to lose his RM200,000 deposit was not allowed to walk away from the deal at such a low cost. He had to top up RM1,300,000.

So, all the more it goes to show the necessity to get legal advice early in the process. Too often, parties think that documentation for transactions are "standard" and as a result, they fail to get advice until it is too late. The recent Court of Appeal decision shows that the loss can be more than even what is anticipated.

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2008 marks my 10th year in practice.

If you have questions or comments, email me at khenghoe@mycounsel.com.my