DEPOSITS

PART IV -B

It is usual for a contract to provide for the payment of a deposit by the Purchaser upon or before
execution of a contract. A deposit is part of the agreed purchase price. There is however no common law
provision entitling the Vendor to demand or require the Purchaser to pay a deposit. Indeed Section 55 of
the ITPA provides for the purchase amount to be delivered on completion. Therefore a special condition
to this effect must be inserted in the contract. This customary requirement has however seen the Law
Society of Kenya Conditions of Sale provide expressly for the same at Condition 3, effectively meaning
that even if not expressly provided for as a special condition it will be implied unless expressly excluded.
The Law Society of Kenya Conditions at the interpretation part has also adopted the customary 10% of
the purchase price. Thus a deposit is defined as:

ten (10) per centum of the purchase money excluding the price of movables, livestock, chattels,
fittings and other separate items Law Society Conditions of Sale.

It is thus basically implied in each contract in Kenya. You can however contract out of it by way of a
special condition and this is often done especially where the Purchaser is being fully financed.

The amount of deposit (i.e. the customary 10%) can also be varied but care is to be taken not to accept
anything less once the variation is effected. Thus if you agree on 20%, as the Vendors Advocate you
should not take 10% otherwise liability for any losses on your client may befall you.

Payment is ordinarily made to the Vendors Advocate or to the Estate Agent who introduced the
Purchaser. The Law Society of Kenya Conditions require payment to be made by bankers draft but it is
now perfectly acceptable to take a client account cheque and it is to be banked in the client account too.
From client account to client account. Often this payment has been varied to be made to the Vendor and
this may be pretty risky. There is need to provide very carefully in such situations; like in estate
covenyancing or sales by developers.

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None payment means that the contract if already signed is repudiated upon notice. It is however always
paid before the Vendor signs the contract and care needs to be taken to ensure that the cheque is cleared
upon presentment.
NATURE

A deposit is security for completion. It is an earnest to bind the bargain and the fear of its forfeiture
creates a motive on the part of the Purchaser to complete. The Purchaser will not capriciously change his
mind. It sort of guarantees performance.

Non-payment of a deposit as agreed means there is fundamental breach of the contract on the part of the
Purchaser and the Vendor is entitled to rescind the contract. Under the Law Society of Kenya Condition 3
rescission will only take place after notice to the Purchaser.

A deposit also counts as part of the purchase price on completion. The Purchasers advocate is at
completion expected to formally authorize the release of the deposit to the Vendor.

Deposits also help create the symbiotic relationship between the Purchaser and the Vendor. It helps to
entitle the Purchaser to a lien enforceable by the courts over the property.

CAPACITY OF HOLDER

Under the general conditions (LSK Cond. 3), the holder of the deposit whether Estate Agent or Advocate
always holds the same as a stakeholder. The agreement can however provide that you hold as agent for
the Vendor.

As an Agent, you hold the money to the order of the Vendor whether you are acting for the Purchaser or
the Vendor himself and the Vendor in such a case has a proprietary interest in the funds. Upon his
demand you have to release to him unless the agreement specifies otherwise. In such cases the funds
may be utilized to his benefit i.e. clear outgoings without necessarily asking for provision.

A Stakeholder holds the deposit to the order of both parties. He holds the same in trust to ultimately deal
with it in different ways in different contingencies. Pay to the Vendor if the sale is completed. Pay to the
Vendor if the Purchaser defaults. Return to the Purchaser if the Vendor defaults. Safety is the
Stakeholders responsibility. You mishandle the same you pay it. You deposit it in a collapsing bank

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you pay. Deposit it in a client account unless urged to do otherwise by the parties. As neither the
Purchaser nor the Vendor has any proprietary claim any interest earned can actually be kept by the
Stakeholder (as reward for holding the stake?) unless the contract states otherwise. As a stakeholder if
the Purchaser consents you may use it as another earnest for the purchase of another property. In the

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the answers to requisition and the searches have not yet expired. This can be done by re-affirming the
requisition answers and or undertaking a pre-completion search.

DATE OF COMPLETION

The date may be agreed expressly by the parties and inserted in the contract. When it is an open contract
(one that only states parties, price and property) or the date is not stated in the agreement the completion
ought to take place within a reasonable period of time. The Law Society of Kenya Conditions of Sale,
Condition 2 however had gone further to provide for a 42 day completion period where no date is
provided. If its a Controlled land then completion is 42 days after Vendors receipt of consent. If not
controlled then 42 days after date of contract.

The period date of completion is important to both parties as it is this period that they satisfy their
contractual obligations or prepare to satisfy the same. For the Purchaser assemble the monies, for the
Vendor obtain the consents and clear the encumbrances, for example. As an Advocate it is thus your
duty to ensure that you get a proper time frame estimated before you agree to or insert a completion
date. Otherwise you will always be held to your bargain and the repercussions can be disastrous.

It must be noted that the completion date or period if there is any delay may be mutually extended.
Where however the parties provide that the time is of the essence then the completion date must be
strictly adhered to. Failure to complete in such a case will be deemed a fundamental breach of contract
both at law and in equity. The party at fault will not enforce the contract specifically but the other party
is free to pursue his remedies for breach of contract including specific performance. He may elect to
rescind the contract the very next date if he chooses. Ordinarily time is only regarded as of the essence if
the parties make it so expressly as a term in the contract. Occasionally however the courts, at least in
England have not hesitated to make time of the essence by necessary implication. Thus in:

Barclay vs- Messenger [1989] 3 All E.R. 492

A Contract provided that if the Purchaser should fail to pay the balance of the
purchase price on a given date, the agreement would become null and void. Sir
George Jessel M. R. held that time was of the essence stating obiter that he did
not know how making time of the essence could have been more strongly
expressed.

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In the Kenyan case of Sagoo Vs Dourado 1983 KLR 365 the Court of Appeal however held that
time will not be considered to be of the essence in any contract unless
i) parties expressly stipulate that conditions as to time must be strictly
complied with
ii) Nature of the subject matter show that time should be of the essence
iii) A party subjected to unreasonable delay gives notice to the other making
Time of the essence

It is a matter of construction of the contract and one may as well argue that S. 3(3) of Cap 23 would
bar such interpretation which invites implications.

When time is not of the essence failure to complete on the agreed completion date does not
entitle the aggrieved party to decline to proceed with the contract. But what of unreasonable
delays despite requests to complete? See Madan J.A in Njamunyu Vs Nyaga 1983 KLR 282
where together with the other court of Appeal judges ,the late Madan seemed to suggest that
the provision as to time being made of the essence can actually be implied.

This should really allow rescission. However it appears from the line of authorities thatin the absence
of undue or unreasonable delay one would still be entitled to specific performance even if he is the
guilty party.

In such instances the aggrieved party needs to give a Completion Notice which must be proper and
explicit. The Law Society of Kenya Conditions have provided for this (Condition 4). Where the
Notice is not needed then one is entitled to rescind as the Notice itself now imposes the time is of the
essence condition. A proper Completion Notice will constitute reason for the alleged breach and
demand that it be made good within the notice period and further that in default Agreement will be
rescinded forthwith upon expiry of the Notice.

To be effective too the Notice must limit a reasonable time for performance. The Notice must also
leave no room that the Server may still be willing to perform the contract if there is still a failure to
complete. Of course to be effective the Server must himself be ready able and willing to complete in
which event the time is also of the essence for him. [Reflection: Will a notice given in anticipation of
breach be good?]

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 INTERIM PERIOD

The interim period as already stated between the execution of the contract and completion is
important for two reasons:

- The performance of the various contractual obligations in preparation for completion.

- The risk of the property.

Performance of Obligations

The Contract will have various obligations imposed on the parties. We have witnessed that one of
them is the payment of deposit which the Purchaser must effect. The Purchaser must also put
together his finances, visit and inspect the property. The Vendor on the other hand must obtain the
requisite consents, discharge and encumbrances (unless agreed it be discharged on completion). Any
other obligation under it must then be honoured.

Risk of the Property

In a Court of Equity once there is a valid Contract of Sale, the Vendor becomes a trustee for the
Purchaser of the estate sold and the Vendor himself becomes owner of the purchase money. This is so
long as the Contract is not subject to a condition precedent e.g. the obtaining of a planning permission.

As a Vendor qua trustee, the Vendor has a personal and substantial interest in the property which he
has to protect and actively so. His interest includes obtaining the purchase money which he can only
do if he also delivers the property held in trust. He is thus under an obligation to ensure that the
propertys condition does not deteriorate nor is the same wasted. The Purchasers interest is however
only in the property and not any income being derived therefrom. As the Vendor is entitled to a lieu
on the property as security of the purchase price, the Vendor will always retain possession. He must
however honour his duty to maintain the same. He must treat property as a prudent owner and not
willfully damage it. He has to use reasonable care to maintain it but he is not obliged to improve it.
The Purchaser is entitled to lay claim in damages if he completes the contract even though the
property has been wasted. But if the property is completely wasted he is entitled to rescind and claim
his deposit. To avoid situations like the latter, the Vendor always takes insurance. It is different if risk
and possession is passed at date of contract.

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ACTUAL COMPLETION

The parties once ready to complete the Conveyance (the Vendor ready to execute the Purchase Deed
and deliver the other completion documents and the Purchaser ready with the purchase money),
completion can be effected. As a general rule it takes place at the Vendors or the Vendors Advocates
offices, but the parties can agree otherwise.

Completion will take place on the date agreed at 2.00 p.m. (Law Society of Kenya Conditions). The
Vendor will deliver the keys (possession) and the Purchase Deed duly and properly executed and the
other completion documents which will include :-

i) Consents;
ii) Clearances;
iii) Title Deed in original form;
iv) Photographs;
v) Authority to release deposit etc.

The Purchaser on the other hand will deliver the cheque for the balance of the purchase price and
apportioned outgoings. At times an undertaking replaces this cheque especially if the purchase is
being financed.

POST COMPLETION

What need you do?

- report to and account to client.
- Stamp documents
- Register documents together
- Notify the world

COMPLETION UNDER THE GENERAL TERMS

(LSK CONDITIONS) cf. Condition 4.

JLO,June 2008
louis@swiftkenya.com