If you have just sold your home and put in an offer for your dream home, what would happen if the purchaser of your existing home did not follow through with the sale?

Revovering your lossed where you have cancelled the sale due to the purchaser's breach cab be a costly and time consuming exercise. Asking for a deposit and including a penalty clause can make this an easier process and you may be able to retain the money paid by the purchaser as a penalty.

But the enforcement of a penalty clause can be problematic, particularly in cases where the clause has been incorrectly drafted, so bear in mind the following:

For a penalty clause to be enforcable the sale must have been cancelled because of a breach committed by the purchaser. If the purchaser fails to procure a loan within a specified time, which is a suspensive condition of the agreement, then the agreement will lapse and the penalty clause will not be enforcable. The failure to fulfill a suspensive condition results in the agreement not coming into effect. There is not breach of agreement.

The purchaser can challenge the amount of the penalty under the Conventional Penalties Act ("Act") if the penalty is out of proportion to the prejudice suffered by the seller. The seller cannot claim damages as an alternative, unless the contract expressly allows the seller to do so.

A "rouwkoop" clause is often confused with a penalty clause, but they are very different. "Rouwkoop" is a mechanism that allows the purchaser to withdraw from the contract. By paying an amount set out in the clause the purchaser exercises a right under the contract and his withdrawal is not regarded as a breach.

A conveyancer may withhold or refuse to return money paid by the purchaser only if the purchaser has, in the sale agreement, authorised the conveyancer to pay the funds to the seller or to hold the deposit in trust pending the determination of damages.

A properly drawn penalty clause should record that if the seller cancels the sale as a result of the purchaser's breach, the seller will be entitled to declare all the moneys paid to the seller or to the conveyancer, including interest, to be forfeited to the seller.

The clause clearly must set out the amounts to which it will apply and when it can be enforced.