ROUWKOOP VS PENALTY CLAUSES IN SALE AGREEMENTS RELATING TO IMMOVABLE PROPERTY
It can be exciting to purchase a property, but what happens when the purchaser has “buyer’s remorse” and wishes to cancel the sale? The purchaser may cancel at any time, but not without consequence. In most contracts, a rouwkoop– or penalty clause will determine the financial implications of cancellation.
The concept of rouwkoop is a common law principle. The word stems from Dutch words meaning “regret” and “purchase”. A rouwkoop clause contains an amount which the parties agreed upon at the time that the contract was entered into, which the purchaser can pay in order to be released from the contract, or in essence, “purchase his freedom”. Rouwkoop, therefore, should not be seen as a penalty.
It is best that a fair and reasonable amount is agreed upon upfront when the contract of sale is entered into, but an agreement may also be reached at a later stage.
If a purchaser enforces the rouwkoop clause and pays the stated amount, he will have complied with his contractual obligations and such a withdrawal from the agreement, will not amount to breach.
A rouwkoop clause in its true form is not popular in modern contracts as it can create uncertainty for a seller when a purchaser can “buy” his way out of the contract in order not be be further bound thereby.
In contrast, a penalty clause will only apply in the event of breach of the agreement.
It does happen, erroneously, that these two concepts are confused and “merged”. An example would be a clause which provides that in the event of cancellation due to the purchaser’s breach, his deposit will be forfeited as rouwkoop.
A true penalty clause will determine that the purchaser will be required to pay the seller’s damages if the agreement is cancelled due to the purchaser’s breach. Any penalty imposed must be in proportion to harm actually suffered in order to comply with the Conventional Penalties Act 15 of 1962 (“the Act”).
In terms of the Act and case law, the Court has discretion to find that any penalty or liquidated damages contained in a contractual obligation may be out of proportion to damages suffered and may reduce the proposed penalty.
A clause which provides for forfeiture of deposit paid, may therefore be unlawful if the amount exceeds actual damage. Sellers are regularly under the wrong impression that the entire deposit may be forfeited. Property practitioners should therefore take care not to perpetuate this misconception when dealing with clients.
An alternative clause would be a clause which instructs the transferring attorneys to hold all funds in trust until the seller’s damages are determined, a settlement is reached, or in the worst case scenario, a court has made judgement.
Buying a property is not a decision that should be taken lightly as there will always be consequences should the transaction not proceed. Parties must take great care when entering into these contracts so as to minimise the risk of costly litigation if things go wrong.