Option Fee or Deposit?

In a recent decision of the NSW Court of Appeal, the Court unanimously dismissed an appeal from a purchaser seeking to recover a purported deposit paid under a terminated Contract. This case highlights the difference between an option fee and a deposit and serves as a reminder of the importance of drafting in legal documents.

Background:

J&Z (purchaser) and Vitti (vendor) entered several agreements regarding the sale of a property in Ultimo. The issue was whether the sum of $2,050,000 was a deposit paid under the Contract and therefore repayable to the purchaser, or an option fee that become the property of the vendor and was credited against the purchase price.

The parties entered an Option Agreement granting the purchaser a Call Option, which required the purchaser pay a Call Option Fee of $2,050,000 (20% of the purchase price). If the option was exercised the Call Option Fee was to constitute the deposit under the Contract and be subtracted from the purchase price payable. If the Call Option was not exercised within the Call Option Period, the vendor would keep the Call Option Fee in full.

A later Amending Deed extended the Call Option Period, whereby the parties agreed that the Call Option Fee had been irrevocably and unconditionally forfeited to the vendor. The Call Option was not exercised, and instead the vendor later exercised their Put Option.

The Contract was created with clauses including the vendor’s right to keep or recover the deposit in the event of the purchaser’s default and the purchaser’s acknowledgement that the deposit would be irrevocably released to the vendor following exchange, which operates despite any other provision in the Contract purporting the refund the deposit.

The Contract was terminated prior to completion and the purchaser sought to recover the disputed sum.

Issue:

Was the disputed sum of $2,050,000 an option fee that became the property of the vendor, or a conventional deposit?

Decision:

The sum was an option fee and remained the property of the vendor regardless of whether the Call Option was exercised. It was paid in consideration for the grant of the Option Agreement and not as a deposit.

Reasoning:

The disputed sum had the character of an option fee and not a conventional deposit which in accordance with the Call Option was “paid to the vendor”. On proper construction of the Contract, read in the context of the Option Agreement and Amending Deed, this sum remained the property of the vendor regardless of whether the Call Option, or later Put Option was exercised.

The sum was consideration for the grant of the Option Agreement, which was strongly indicated by the words within the Option Agreement relating to where the Call Option is not exercised, the vendor will “keep all amounts paid as the Call Option Fee”. The right to exercise the Put Option only arose once the Call Option Terminating Date had expired, at which time the vendor was entitled to keep the Call Option Fee, which acted as a credit against the purchase price of the property.

Although the disputed sum was referred to in parts of the documentation as “the deposit” it was not determinative of its true legal character, particularly considering the poor drafting. The Court relied on the decision of Kazacos which characterised the essence of a deposit as an “earnest” of the bargain or performance and an assurance that the vendor could take his property off the market having comfort that the deposit is held for security.[1] The use of the word “deposit” was to deem the sum as a deposit rather than indicative of its character as a conventional deposit.

Key Takeaways

This case serves as a useful reminder to practitioners of the importance of drafting in legal documents. Throughout the judgement, numerous references were made to the poor drafting which raised issues of interpretation of “the deposit”. The Court also confirmed their position that when considering whether a sum constitutes a deposit, they will look to its true legal character. A sum cannot merely be called a deposit, it needs to possess the character of a deposit.


[1] Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504

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