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Penalty clauses in property sale agreements: are they enforceable?

Updated: Jul 3, 2020

Agreements to purchase immovable property often contain provisions in terms of which a purchaser will forfeit his deposit in the event of the agreement being cancelled as a result of the purchaser being in breach and failing to remedy such breach.

The Conventional Penalties Act specifically stipulates that, should a court find that a pre-determined penalty is out of proportion to the prejudice suffered by a creditor as a result of the breach and cancellation, the court may reduce the penalty to such extent as it may consider equitable in the circumstances. This means that, even in the event of the agreement specifically determining that a purchaser will forfeit his deposit in certain instances, it does not prevent such purchaser from approaching a court to claim a reduction of the amount of the penalty.

It is important to note, however, that these provisions should not be equated with rouwkoop. If an agreement states, for example, that the purchaser may elect to terminate the agreement by paying the amount of the deposit to the seller “as rouwkoop”, the purchaser may legally withdraw from the agreement on payment of the amount stipulated. A purchaser withdrawing from an agreement in terms of a rouwkoop clause will accordingly not be in breach of the agreement and the seller will not be able to hold such a purchaser to the agreement or claim other damages.

There should thus be a clear distinction between these two concepts. In practice, however, forfeiture and rouwkoop are often used interchangeably which is incorrect and hazardous.

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This article is not intended to constitute legal advice and is produced for information purposes only and to provide a general understanding of the legal position relating to the topic. It is recommended that advice relating to the specific circumstances of your situation be sought from our attorneys before acting upon the content of this article. This article was written at a particular point in time and accordingly may not always reflect the most recent legal developments, if any, applicable to the relevant topic. Kaplan Blumberg and its partners and/or employees, are not responsible for any consequences which may follow upon any decision taken to act upon the information provided in this article.

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