A buyer pays a sum on agreeing to purchase a flat, a car, or a shop, then circumstances change and one party withdraws. The usual dispute follows. The seller says the sum was earnest money it is entitled to keep, and the buyer says it was a part payment that must be returned. In truth the legal characterisation of the sum determines the outcome, and that characterisation is drawn not from the label the parties wrote but from their real intention and the drafting of the agreement. This article explains the rules on earnest money and promises to sell under Civil Code No. 67 of 1980.
What Earnest Money Is
- Its original function: earnest money is in principle evidence that each contracting party has a right to withdraw from the contract. It is the price of the right to withdraw rather than merely a payment.
- Effect of withdrawal: a party who paid the earnest money and withdraws forfeits it, and a party who received it and withdraws returns double. Many buyers are unaware of the second limb of this rule.
- Agreement to the contrary: the parties may agree that the earnest money confirms conclusion of the contract rather than paying for a right to withdraw, in which case it forms part of the price and withdrawal is not permitted.
- Intention governs: the parties' intention is drawn from the agreement as a whole and its circumstances, and the word "earnest money" alone does not produce its effect.
- Ambiguity: unclear drafting produces protracted disputes, so an express statement of what is intended is the most important clause in the agreement.
Earnest Money or Part Payment
- Part payment: where the sum is an advance on the price under a complete contract of sale, neither party may withdraw, and a party in breach is compelled to perform or answers in damages.
- Earnest money as a withdrawal price: gives each party the option to withdraw at a known cost, ending the relationship on exercise without further compensation.
- The decisive practical effect: in the first case the buyer can compel the seller to complete, while in the second the buyer can only recover double what was paid.
- What points to characterisation: stating that the sum forms part of the price, fixing a date for final execution, and detailing the subject matter and price all indicate a complete contract rather than a preliminary understanding.
- A common error: writing a receipt describing the sum as "earnest money as an advance on the price", a contradictory phrase combining both characterisations and generating the dispute by itself.
Promises to Sell
- Definition: an agreement by which a person undertakes to conclude a defined contract in the future, a contract in its own right rather than mere negotiation.
- Validity requirements: it must identify the essential terms of the promised contract and fix the period within which it must be concluded, failing which the promise is void.
- Unilateral promise: binds the promisor alone, while the promisee remains free to accept within the period.
- Bilateral promise: binds both parties and is practically closest to a preliminary sale in property transactions.
- Form: where the law requires a particular form for the promised contract, the same form must be observed in the promise, a fundamental point in real property dispositions.
- Consequences of default: where the promisor defaults, the promisee may seek a judgment declaring the contract valid and enforceable or claim damages as the case may be.
Recurring Practical Situations
- Seller withdrawing on a price rise: the most common dispute. Where the agreement was a complete sale the seller cannot withdraw, and where it was withdrawal earnest money the seller must return double.
- Financing falling through: where the agreement is not expressed to be conditional on bank approval, the buyer bears the consequence. The remedy is an express clause making the obligation conditional on obtaining finance within a defined period.
- An impediment emerging in the property: a mortgage, attachment, dispute, or undisclosed building violation, where withdrawal is justified and the buyer recovers what was paid with a right to damages.
- Delay in final execution: where no period is fixed, a reasonable period applies, and the safer course is to state a specific date and the consequence of exceeding it.
- Paying an agent: handing earnest money to a real estate office without written authority from the owner is a significant risk, and payment should be made to the owner or into a documented account.
- Death before completion: financial obligations pass to the estate, and a promise is not in principle discharged merely by death.
Drafting the Agreement
- Characterise the sum expressly: stating whether it is earnest money permitting withdrawal or a non-refundable part payment, in terms admitting no other reading.
- Identify the subject matter precisely: plot and parcel numbers, area, and boundaries for property, and full vehicle particulars for a car.
- Price and payment: in total and in instalments with defined dates.
- Date for final execution: a specific date rather than "as soon as possible".
- Conditions precedent: such as financing approval, the property being free of mortgages, or obtaining official approvals.
- Consequences of breach: a clear and reasonable penalty clause, as an excessive one is exposed to judicial reduction.
- Documentation: a dated and signed receipt stating the reason for payment, and a bank transfer is preferable to cash as it evidences both the fact and the date.
- Verifying title: reviewing the title deed and confirming the signatory's capacity and authority before paying anything.
Practical Guidance
- Do not pay anything before signing a written agreement stating the characterisation of the sum and the effect of withdrawal.
- Avoid the phrase "earnest money as an advance on the price", the phrase that generates most disputes in this area.
- Request a copy of the title deed and verify the absence of any mortgage or attachment before paying.
- Where the purchase depends on bank finance, make that an express condition precedent with a defined period.
- Do not hand over cash without a receipt, or pay a third party without written authority from the owner.
- Watch the period fixed for execution, as prolonged silence after it expires may be treated as waiver.
- On withdrawing, serve written notice immediately to fix the date, as the date determines liability.
The value of earnest money lies in its characterisation rather than its amount, and one clear line in the agreement saves years of litigation. Yamnak Law Firm drafts preliminary sale agreements and promises to sell and reviews title documents, and conducts specific performance, deposit recovery, and damages claims before the courts.
