What Happens When a Buyer Backs Out? Understanding the 10% Deposit and Forfeiture Rules in Malaysia

When a property buyer backs out in Malaysia, deposit forfeiture depends on the signed documents, timing and agreed conditions. This guide explains the common 10% deposit issue and the checks both sides should make before assuming the money is lost or refundable.

Introduction

A buyer makes an offer, pays a deposit, and then changes their mind. It happens — and when it does, both buyer and seller need to understand exactly what the legal and financial consequences are.

Malaysian property law has clear rules on deposits, default, and forfeiture. The outcome depends on what type of deposit was paid, at what stage the buyer withdrew, and what the SPA says.

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Two Types of Deposits — and Why the Distinction Matters

1. Earnest Deposit (also called Letter of Offer / Booking Fee)

When a buyer makes an initial offer, they typically pay an earnest deposit — commonly 2–3% of the purchase price — to secure the property while the SPA is being prepared. This is evidenced by a Letter of Offer or Offer to Purchase.

Key points:

• The earnest deposit is held by the seller's solicitor as stakeholder
• It does not form part of the SPA until the SPA is executed
• If either party fails to proceed to SPA within the agreed timeframe (typically 14–21 days), the deposit may be forfeited or returned depending on who is at fault
• If the buyer withdraws before SPA is signed, the earnest deposit is generally forfeited to the seller
• If the seller withdraws before SPA is signed, the seller typically refunds the earnest deposit and may owe additional damages depending on the Letter of Offer terms

2. SPA Deposit (10% under the Sale and Purchase Agreement)

Once the SPA is signed, the buyer pays a further sum to bring the total deposit to 10% of the purchase price. This is the contractual deposit under the SPA.

Example:

• Purchase price: RM 600,000
• Earnest deposit paid (3%): RM 18,000
• Balance deposit on SPA signing (7%): RM 42,000
• Total SPA deposit: RM 60,000 (10%)

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What Happens If the Buyer Defaults After Signing the SPA?

Under the standard SPA (and common law principles), if the buyer fails to complete the purchase — for example, by failing to secure loan financing and not making payment by the completion date — the seller's default remedies include:

Option 1: Forfeit the 10% deposit The seller terminates the SPA and retains the 10% deposit as agreed liquidated damages. The seller is then free to re-sell the property.

Option 2: Specific performance (sue to compel completion) The seller can apply to court for a court order compelling the buyer to complete the purchase. This is more relevant where the property is unique or has substantially appreciated, making the forfeited deposit an inadequate remedy.

In practice, forfeiture of the 10% deposit is the most common outcome. Sellers rarely pursue specific performance unless the gain from forcing completion substantially exceeds the deposit already forfeited.

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What Happens If the Seller Defaults?

If the seller defaults — for example, by refusing to complete or by selling the property to another party — the buyer's remedies are:

Option 1: Refund of deposit + equal sum as damages The standard SPA typically provides that if the seller defaults, the buyer is entitled to a refund of all monies paid plus an equivalent sum as damages — effectively double the deposit.

Option 2: Specific performance The buyer can apply to court to compel the seller to transfer the property. Land is considered unique in law, so specific performance is a common remedy in property cases.

Option 3: Claim actual damages If the buyer's actual loss exceeds double the deposit (for example, if the property has substantially appreciated), the buyer may pursue actual damages instead.

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Loan Failure — Who Bears the Risk?

A common scenario: the buyer signs the SPA but subsequently cannot secure a bank loan. Does the buyer forfeit the deposit?

Standard SPA (no finance clause): If the SPA does not contain a condition precedent making the agreement conditional on loan approval, the buyer is liable regardless of whether they obtain financing. Failure to pay = default = forfeiture of deposit.

Finance clause: Some SPAs — particularly in negotiated transactions — include a condition that the agreement is subject to the buyer obtaining a loan within a specified period. If the buyer fails to obtain financing and gives timely notice, the SPA is terminated without forfeiture.

Important: The prescribed SPA under HDA 1966 (for new developments) does not automatically include a finance clause. Buyers of sub-sale properties should negotiate a finance clause when the seller is willing.

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The Booking Fee Trap

Some developers and sellers request a "booking fee" before a formal Letter of Offer or SPA is issued. This is an informal payment — not governed by the HDA 1966 or prescribed SPA — and creates ambiguity:

• Is it refundable if the deal falls through?
• What is the seller's obligation if they accept a higher offer?
• What documentation evidences the transaction?

Agents should never advise a client to pay a booking fee without at minimum a signed Letter of Offer clearly specifying refund conditions, timelines, and the rights of each party.

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Forfeiture Is Not Automatic — It Requires Notice

Sellers cannot simply retain the deposit without following the proper contractual process. The SPA typically requires the seller to:

1. Serve a notice of default on the buyer
2. Allow the buyer a cure period (typically 14–30 days) to remedy the default
3. Only after the cure period expires without remedy, serve a notice of termination and forfeit the deposit

Failure to follow proper notice procedures can expose the seller to a claim that the termination itself was wrongful.

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For Agents

Understanding deposit mechanics is essential for managing expectations on both sides:

• Advise buyer clients on the risk of default before they sign the SPA — particularly if their loan approval is uncertain
• Advise seller clients not to terminate or re-market a property without following the proper SPA default notice procedure
• Document all deposit payments with proper receipts, held by solicitors as stakeholder — never pay deposits directly to the seller or agent
• Flag any "booking fee" arrangement that is not covered by a signed document

If either party asks you what their legal exposure is, your answer is: "I'm not your solicitor, and you should get specific legal advice — but here's how these clauses generally work so you can have an informed conversation with your lawyer."

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Published on PropPlace.my — Malaysia's co-broking property marketplace for industrial, commercial, and land transactions.

Related transaction guides

Deposit forfeiture should be read with the SPA red flags guide, the residential buying guide, and the property selling guide.