Stage Payments – Tips and Traps for Developers

• 14 August 2025
• Views

Tips and Traps for Developers 2025 #3: Stage Payments

Under the Standard Conditions of Sale (Fifth Edition) and in most residential property transactions, a 10% deposit is considered reasonable and is highly unlikely to be considered penal; it is the market norm.

However, many new build residential properties are sold “off-plan” (i.e. before practical completion of the development).  These transactions exchange months or years before completion and consequently stage payments have become industry standard, serving as a demonstration of buyers’ commitment to the purchase during the construction period.  Most developers will insist on at least a further 10% to be paid between exchange and completion, if not more.  

But what actually happens in the event the buyer fails to complete?  A deposit which constitutes an unreasonable sum may be deemed an unlawful penalty.  In the case of Cavendish v Makdessi it was ruled that a contractual clause will be deemed a penalty when a sum or remedy stipulated in the contract as a consequence of breach is “exorbitant or unconscionable” in the context of the innocent party’s interest in the performance of the contract.  Ultimately, the seller must show that “special circumstances” apply which render a deposit of over 10% justifiable. In a straightforward second-hand transaction, for example, it is generally unlikely that any special circumstances could be shown.

If a deposit is found to be a penalty, even if the buyer is in default, the seller could be required to re-pay all funds held under the contract if they are found to be a single sum – i.e. both the 10% deposit and any further stage payment(s). 

The law around special circumstances remains unsettled, each transaction will depend on its own circumstances and the provisions of the contract, and there is limited recent case law.  Whilst it might be possible to argue that, for example:

• Deposits of over 10% are now commonplace in off-plan developments (often being a requirement for development financing and/or funding construction costs);
• Buyers should have been advised by their solicitor on the consequences of failing to complete – including the loss of deposit and stage payment(s);
• The (likely lengthy) period between exchange and completion justifies a higher deposit as the seller bears a higher risk;
• It is not possible to definitively assert that this would constitute “special circumstances”.  

In practice, it is very unlikely that a 10% deposit would ever be ruled unreasonable, even if the contract contained stage payments or other sums due towards the purchase price prior to completion which were considered penal (though it is vital the contract stipulates the 10% deposit can be severed from any stage payments to ensure recoverability.) 

Provided a buyer is well advised and the relevant contractual provisions are carefully drafted, one would hope the courts are likely to be considerate of the fact the negotiating parties are best placed to determine what consequences should flow from a breach and therefore, the contract will prevail.  In addition, the fact that any stage payments required should have been made clear to a buyer before they reserve (and they would have had the opportunity to “walk away” from the purchase if they considered the terms too onerous) must surely count for something.

In a nutshell, the law is uncertain and each and every transaction will depend on its own circumstances and exact wording of the contract.