When a rouwkoop clause occurs in a sale agreement of an immovable property, a deposit is paid to the seller which would be forfeited in the event of the buyer withdrawing from the sale agreement.
This does not constitute breach of the agreement, but is a mechanism whereby the purchaser legally buys his way out of the agreement.
While it serves as a protection for the seller, a rouwkoop clause can be a cause for concern for the buyer.
This is because the seller will be able to keep the deposit, which is usually 10-20% of the purchase price even if the buyer cancelled the agreement only moments before signing the sale agreement.
The buyer will have suffered significant loss whilst the seller would have benefited as a result.
Up until a recent judgement ruling, it was generally viewed that the court had no authority to order the deposit to be returned to the buyer on the basis of any law including the Conventional Penalties Act.
However, in the case of Epic Properties (pty) Ltd v Le Hanie NO and Others a change to the law was brought about and it was found that the Act also, in fact, applied to a rouwkoop clause.
According to section 3 of the Conventional Penalties Act, if there is a claim for a penalty and it is decided by the court that such a penalty is actually more than the prejudice suffered, then this penalty could be reduced to what is considered fair with regards the circumstances.
And since the court found that the Act did in fact apply to the rouwkoop clause, it meant that the rouwkoop amount could also be reduced.
However, this was dependant on the court being persuaded that the loss suffered by the seller as a result of the buyer withdrawing from the contract was out of proportion to the rouwkoop amount.
If the seller is a property development or in the business of selling property in general, the sale agreement would then be most likely governed by the provisions of the Consumer Protection Act.
This would prohibit the rouwkoop clause from coming into effect as it deems the terms of the contract to be unfair and unreasonable.
In conclusion, the amount that is retained by the seller if the purchaser cancels the sale agreement is no longer decided based on the terms of the agreement.
With this new change buyers are granted protection from the clause if they can prove that the rouwkoop amount is not equitable with the damage suffered.
For expert legal advice on matters of property law please contact us.
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