Deposits are intended to provide some assurance to the seller that the buyer is committed to the transaction and to cover the seller’s costs if the buyer withdraws for no justifiable reason. Deposits are usually combined with an exclusivity period so that in return for payment of the deposit, the seller agrees not to enter into discussions with any other potential buyers for an agreed period of time, giving the buyer some comfort that they can invest time in the proposed transaction and incur costs in the knowledge that other interested parties are not being entertained by the seller.
Guidance note for deposits in pharmacy and dental transactions
If a pharmacy or dental practice sale transaction is aborted, which party is entitled to the deposit?
Deposits are common in healthcare transactions however disputes can arise about which party is entitled to the deposit if the transaction is aborted or exchange does not take place by the target date. So what is the legal position in respect of deposits?
The buyer is usually asked to pay the deposit to the sales agent or the seller’s solicitor shortly after agreeing heads of terms on the basis that if the sale proceeds to completion the deposit will be used as part payment of the purchase price.
The deposit will be held on the terms agreed by the parties prior to the payment of the deposit. These terms will determine whether the buyer or seller will be entitled to the deposit if the sale does not proceed in various circumstances.
Deposit agreements are normally prepared by the sales agent or the seller’s solicitor and provide that the deposit is not refundable to the buyer except in certain specified circumstances such as:
- Unreasonable delay on the seller’s part or the seller withdrawing from the sale (other than because of delay by the buyer).
- The discovery by the buyer of a material error in the information already supplied by the seller about the pharmacy/practice or a non disclosure by the seller which has a material effect on the price.
- The discovery by the buyer of a defect in the title of the premises or structural issues with the property.
- The seller changing the way that the pharmacy/practice is run after agreement of the heads of terms such as increasing staff wages without the buyer’s prior consent.
- The seller seeking to materially change the terms of sale without fair reason.
- The seller breaching the exclusivity provisions.
- Mutual consent by the parties.
The parties often agree that the deposit is immediately forfeited to the seller and the period of exclusivity ends if:
- The sales agent has not been able to contact the buyer for a specified period of time.
- The buyer withdraws from the purchase unless for a prior agreed and justified reason.
By the time a transaction is aborted, each party is likely to have incurred legal or other costs and invested time in the proposed transaction so each will be keen to receive the deposit.
In our experience most disputes are due to the buyer pulling out of the transaction and alleging that the seller made a material misrepresentation about the pharmacy/practice or made a material change to the way it was being run during the exclusivity period. The problem is that an issue or change that the buyer might consider to be material and significant might be regarded by the seller as largely immaterial or insignificant. What is ‘material’ is often not clear cut and will be open for debate. For example, when does a change to staff wages by the seller between agreement of the heads of terms and exchange become ‘material’? Would a 1% increase be enough or would it need to be 5% or above to be material?
If the parties cannot reach agreement about how the deposit should be allocated then ultimately the court would need to decide.
If a sales agent is involved and a dispute arises they are very unlikely to get involved. They will generally retain the deposit pending agreement between the parties or an order from the court for the release of the deposit.
- Before signing a deposit/exclusivity agreement, we recommend that both parties have the terms of the agreement reviewed by a specialist lawyer to ensure that they understand the risks involved.
- The buyer in particular will need to understand that if they decide to pull out of the transaction before exchange they will most likely lose their deposit, except in certain agreed circumstances.
- The parties should seek to agree the specific circumstances in which the buyer will be entitled to the return of their deposit and try and agree as far as possible what might be considered a material issue, for example an issue affecting say 5% or more of the marketed price. The buyer should not be afraid to try and negotiate the terms.
- The parties will need to discuss and agree an exclusivity period at the outset. The seller will be keen to agree a short exclusivity period so that the sale is progressed quickly and to keep the buyer focused whilst the buyer will most likely seek a longer period to allow them time to carry out thorough due diligence.
- The buyer should keep an eye on the exclusivity period and if it is likely to expire before contracts are exchanged, the buyer should ensure that an extension is sought.
- The buyer should review any due diligence responses thoroughly as soon as they are received and immediately raise any issues with the seller. If they do not do so and the buyer only much later notices something detrimental in the replies and withdraws from the transaction because of it, they will face an argument by the seller that the buyer has waived their right to rely on that reason for the return of the deposit. The seller will have continued to incur costs in the meantime.
- If either party intends to pull out of the transaction, they should first seek legal advice as to the position in respect of the deposit so that they can make an informed decision and obtain advice on how best to present their reason to the other party to protect their position in respect of the deposit as far as possible.
- If a dispute arises and a sales agent is involved and the seller objects to the return of the deposit to the buyer, the terms usually set a deadline for the buyer to respond to the agent with reasons why they contest the seller’s argument for forfeiture. The buyer will need to make sure they do not miss that deadline because if they do, the deposit is likely to be passed to the seller by default.
- The cost of court proceedings to determine which party is entitled to the deposit is likely to exceed the value of the deposit and will take several months to be concluded. If the position is not clear cut it is usually sensible for the parties to try and negotiate a compromise on a without prejudice basis so that the deposit is shared in appropriate proportions.