By Liad Hadar, Director at Hadar Incorporated, Specialist Property Law Firm
This article first appeared in Asset Magazine’s March 2025 edition
In the world of property sales, sellers often grapple with the risk of purchasers breaching or entirely withdrawing from a sale despite the conclusion of an agreement.
To mitigate this risk, sellers frequently require deposits to secure a transaction, which generally indicate a level of seriousness by the purchasers.
In my view, on a basic and practical level, obtaining a deposit is sufficient for purposes of indicating a serious intention to purchase but if the purchasers can simply be refunded their full deposit, or the majority of it, the proceeding benefit from the deposit is lost.
Sellers often, incorrectly, believe that they are simply entitled to retain “non-refundable” deposits in the event of a breach by the purchasers and a subsequent cancellation of the agreement. The reality is that they must first institute action for damages resulting from such cancellation and only after obtaining a judgment, which will require quantification of their damages, can they utilise the deposit against such judgment.
The legal treatment of “non-refundable” deposits varies significantly when compared to rouwkoop. Though harsh, rouwkoop clauses are enforceable, so long as they are not excessive and are carefully drafted.
Understanding this difference is crucial for sellers who wish to ensure that their potential purchasers are genuine and at the same time protect themselves financially in the event of a cancellation of a sale agreement, while staying within the boundaries of the law.
What is Rouwkoop?
Rouwkoop is a legal principle in terms of South African contract law that effectively allows a purchaser to pay an agreed sum for the right to withdraw from a signed and binding agreement.
Essentially, it is a pre-estimated amount agreed upon between the parties, compensating the seller should the purchaser elect to cancel the agreement, despite having no legal right to do so.
Unlike a “non-refundable” deposit, which requires quantification and legal action, rouwkoop is not framed as a penalty for a breach and cancellation but rather as a legitimate, pre-negotiated “exit fee” for the purchaser.
The benefit of using rouwkoop is that it provides clarity on the consequences of cancellation.
The purchaser explicitly agrees to forfeit a certain sum in the event of the transaction not proceeding as a result of the purchaser’s conduct.
The Issue with Non-Refundable Deposits
Many sellers mistakenly believe that a “non-refundable” deposit offers the same protection as rouwkoop. Our courts have ruled that if the retention of a deposit is structured as a penalty for non-performance, it will fall squarely within the ambit of the Conventional Penalties Act 15 of 1962.
The Conventional Penalties Act allows a court to reduce or even disregard a penalty if it is found to be out of proportion to the prejudice suffered by the innocent party (for purposes of this article, the seller).
This means that although a deposit is labelled as “non-refundable”, without an explicit rouwkoop clause, a purchaser who defaults on a sale agreement may successfully challenge the forfeiture of their deposit (either in full or the majority of it), especially if the seller has suffered little to no financial loss. In such circumstances, the court will most likely order that the total deposit, or majority of it, be refunded to the purchaser, despite their default in the agreement.
To avoid this, as above, the seller is required to quantify its damages, institute legal proceedings and obtain a judgment for this, whereafter it can utilise the deposit and refund the balance, if any, to the purchaser.
Why Sellers Should Use Rouwkoop
The advantage for sellers, structuring deposits as rouwkoop provides greater certainty and legal defensibility in the event of a purchaser claiming a refund of the deposit.
The key advantages include:
- Narrowing the Application of the Conventional Penalties Act – given that the correct use of the rouwkoop clause is to provide the purchaser with contractual right to cancel the agreement, at a cost, rather than a penalty for breach, such scenario does not fall squarely within the scope of the Conventional Penalties Act.
That said, if the purchaser is in breach and the agreement is subsequently cancelled and the rouwkoop retained, this would likely fall within the ambit of the Act and the courts will still analyse this, particularly from a point of view of excessiveness. There is however a better prospect of avoiding strict application of the Act in these circumstances and although a portion may be refunded, it would be easier to prove that the retained amount, or a substantial portion thereof, is owed to the seller by agreement between the parties. - Providing Legal Clarity – A properly worded rouwkoop clause makes it clear that the purchaser is paying for the right to withdraw, reducing the risk of a dispute over whether the seller can keep the deposit.
- Ensuring Pre-Estimated Damages – Since the amount is agreed upon upfront, it serves as a reasonable compensation for the inconvenience and financial loss incurred by the seller. It would be difficult to argue that the court should undermine the parties’ rights to contract freely on any such commercial terms.
- Strengthening the Seller’s Position – Buyers are more likely to commit seriously to a transaction when they understand that they have something to lose should they simply change their minds and seek to opt out of a transaction for any reason. Simply said, the position of a seller with a rouwkoop clause compared to one with a “non-refundable” deposit is more advantageous.
Drafting an Effective Rouwkoop Clause
To be of the true essence of its intention and to be enforceable, a rouwkoop clause must be carefully worded.
It should explicitly state that the purchaser has the right to unilaterally cancel the agreement and in exercising that right, will forfeit a pre-agreed sum. The language should make it clear that this is not a penalty for breach but a consideration for the right to terminate the contract.
Potential Pitfalls to Watch Out For
While rouwkoop offers significant advantages, sellers should be cautious of the following:
- Excessive Amounts May Still Be Scrutinized – Even though it can be argued that rouwkoop is to be considered differently in terms of the Conventional Penalties Act, courts may still scrutinize the amount to ensure it is reasonable in relation to the transaction value and not unequitable or contrary to public policy.
- Ambiguity Can Undermine Enforceability – If the wording of the clause is vague or inconsistent with the overall agreement, a purchaser may still successfully challenge it and argue that it was not the parties’ true intention.
- Tax Implications – Depending on the nature of the agreement, forfeited rouwkoop payments could be deemed to be in income of sorts and may have tax implications for the seller. Professional accounting/tax advice should be sought when allocating such payments.
Conclusion
For sellers, the use of a rouwkoop clause provides a legally sound method of ensuring financial protection if a purchaser withdraws from the sale due to their own decision and opting out, with the repercussions of such decision well recognized in the agreement.
Although more debatable, in the event of a breach by the purchaser and a subsequent cancellation, the seller’s position to retain the rouwkoop amount is stronger than that of a “non-refundable” deposit.
By structuring transactions correctly, sellers can minimize legal disputes, place themselves in advantageous positions and protect their interests while maintaining fairness in the contractual relationship. As always, consulting a qualified property attorney is advisable to tailor the agreement to specific circumstances and legal requirements.