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A Promise to Sell – Payment of Deposit – Part II

by Dr Laura Calleja – Junior Associate

This article is the second part of a collection of articles dealing with the legal issues surrounding the Promise of Sale.

As outlined in the previous article – A Promise to Sell – An Overview – Part I, when purchasing a property one may choose to either finalise the sale there and then, or else choose to sign a promise of sale agreement, otherwise known as the konvenju, establishing a time frame within which the final deed of sale shall be signed. The konvenju is normally resorted to as it not only blocks the price, but it also provides enough time for both parties to make sure that certain conditions, established to their favour, are successfully met by the other party.

It is worth noting that the promise of sale, unlike the final deed of sale, is designated as a private writing; thus, despite having to be signed by all involved parties, it can be signed at different time intervals. The same can be said for any promise of sale extensions that follow.

For a promise of sale to be binding, certain components need to be present, that is; (i) the sale price needs to be indicated; (ii) the immovable property being sold needs to be properly described; (iii) both parties need to sign said agreement; and consequently (iv) the promise of sale needs to be registered with the Promise of Sale Notification – Inland Revenue Department. Should one of these elements result to be missing, the promise of sale is rendered ineffective.

As one can infer from the above, the payment of a deposit, whether in the form of earnest (kapparra) or in the form of a payment on account of the price, is not necessary for the validity of the konvenju. Nevertheless, it is customary that such payment is made.

The question that follows is: Should either party retract from his/her promise to sell/purchase the immovable property in question who has a right over the deposit paid? And what difference does it make if one pays a kapparraas opposed to a deposit on account, or vice versa?

Prior to answering this question, it is worth briefly analysing the nature of the kapparra and the deposit paid on account of the final price.

The Kapparra – Earnest Money

Earnest money is often given by the prospective purchaser to the prospective seller as a way to mark the conclusion of a contract. Due to its nature, earnest money is not attributable to the final purchase price. Nevertheless, in those cases where earnest is given in monetary form it is naturally convenient to do so.

To answer the question previously posed one must refer to Article 1359 of Chapter 16 of the Laws of Malta. The latter establishes that should a promise of sale be concluded with the giving of earnest money, either party may at any point in time retract from his/her promise to sell or to buy; in the case of the prospective purchaser, by forfeiting the earnest money paid and in the case of the prospective seller, by paying double the earnest money received.

It is worth noting however, that Court judgments are relatively inconsistent in their conclusion as to whether such forfeiture is automatic or not.

It is however, undisputed that should the promise of sale expire and the parties fail to take the required action outlined in article 1357(2) of Chapter 16 of the Laws of Malta (read here), both will revert to the status quo ante – that is, to the position they were in prior to the signing of the konvenju and this without forfeiting said earnest money paid and/or being obliged to pay double its amount.

Deposit on account of the price

On the other hand, deposit on account of the price is somewhat simpler when compared to the payment of earnest money.

As the term suggests, such payment of deposit is immediately attributed to the final price. Therefore, and to answer the question previously made, should the final deed of sale not take place for whatever reason, the deposit paid on account of the price by the prospective purchaser is to be returned to him/her. It is a common misconception that the prospective vendor can retain the deposit paid by the prospective purchaser should the latter decide not to appear on the final deed of sale without doing anything else.

This is incorrect. The only solution available to the prospective vendor should the purchaser not want to appear for the final deed of sale is that of enforcing the sale against the prospective purchaser, and not to keep the deposit. There is no action to retain the deposit under Maltese Law; it is either enforcing the sale in the manner and time provided by article 1357 (2) of Chapter 16 of the Laws of Malta, or else, the parties return to their original position, as if a promise of sale was never signed. This reasoning has been supported by a number of judgments, most notably the Court of Appeal judgment of Pont Gloria vs J.L.J. Construction Company Limited.

These misconceptions surrounding promise of sale agreements will be dealt with in the third part of this collection of articles about the Promise of Sale.

In conclusion, it is worth noting whether a kapparra or a deposit on account are paid, the only manner that the parties to a promise of sale can ensure that they do not lose their right to the property or the final sale price subject to the agreement is by adhering to the procedure outlined in the law. Failing to do so will result not only in losing one’s right to the property or the final sale price promised, but also does not guarantee the payment of damages in favour of the party who is not at fault.

Disclaimer: This article is not to be considered as legal advice, and is not to be acted on as such. Should you require further information or legal assistance, please do not hesitate to contact Dr Laura Calleja on laura@abalegal.eu.