Retaining or returning deposits (important and updated advice)

It has long been thought that if a consumer decides to pull out of a car purchase having paid a deposit, that the car dealer is automatically entitled to retain that deposit.  However, there are several important considerations that need to be met before that is allowable, the first of which is especially relevant.  

1. The Consumer Rights Act 2015 says that a contract term may be considered unfair (and thus unenforceable) if it is “A term which has the object or effect of permitting the trader to retain sums paid by the consumer where the consumer decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the trader where the trader is the party cancelling the contract. We are advising that your terms/conditions, order form and any document that makes reference to a non-refundable deposit, be reworded as below, followed (where possible) by the consumer’s signature:

“By paying a deposit you are entering into a legally binding contract.  If you change your mind and do not pay the balance due, you will be in breach of contract and we will be entitled to retain the deposit in full and not return it to you.  However, if we are in breach of contract and do not agree to sell you the car upon payment of the balance, we will return your deposit in full and you may be entitled to additional compensation from us up to the full value of the deposit amount”.

2. The amount of deposit is the most you can retain.  You cannot retain a deposit and then on top of that seek losses such as prep time or having to re-advertise or re-selling at a lower value.  The whole purpose of a deposit is it gives certainty as to what can be lost in the event of contractual breach - regardless of whether your actual loss is greater or less than the amount of the deposit.  HOWEVER………

3. The deposit figure must be a proportionate to the value of the vehicle – you cannot simply seek to punish the buyer by making him pay a hugely disproportionate deposit and retaining it if he or she does not pay the balance.  The Court of Appeal ruled in 2016 (and gave a new test of what is allowable) and removed the test of “reasonable pre-estimate of loss” and “penalty clauses” and replaced it with this, somewhat wordy conclusion:

“The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance.[Emphasis added].”

4. Whilst the courts – and only the courts can decide – we think that a deposit that is greater than 10-15% of the value of the car might be seen as difficult to justify except in very rare circumstances.  Maybe where something is being built to such an unusual, bespoke and personal specification that the sale to anyone else other than the actual buyer would be compromised substantially or could only be re-sold at a price significantly less than agreed with the intended buyer (who then did not pay the balance after the deposit was made).

5. Where a deposit is taken in contemplation that the car will be financed by, say a hire-purchase agreement, the deposit must be refunded if the consumer withdraws from the deal BEFORE all three parties sign the finance agreement – as set out by Section 57 the Consumer Credit Act 1974 (Withdrawal from a Prospective Agreement).  This does NOT form an obligation to fund the purchase of the car by some other means.

6. Where the consumer cancels the credit agreement within 14 days of all parties signing the credit agreement, then there IS an obligation to buy the car by some alternative means BUT we will argue that this obligation is between the consumer and the finance company (not the dealer) as the finance company have bought the car from the dealer, has good title in it and the dealer is not in breach of contract.  Again, though, some finance companies may, in their terms and conditions have a clause that states that the dealer has to indemnify them in the event that this happens!

So, anyone who tells you that the law of refunds of deposits is straight-forward, invite them to read the above!

Lawgistics can advise you on compliance when selling vehicles to consumers or trade customers,  Members can get advice on this and other legal matters by contacting the legal team on 01480 455500.


Authors: Jason Williams

Published: 17 Feb 2020


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