What is a non-refundable deposit?

A deposit is part of the total cost of something or an advance payment paid for at the time of booking. Businesses will sometimes insist it's non-refundable if you cancel and even write it into the contract.

But a business can only do this if the contract term is fair.

Can a deposit be non-refundable?

Just because something is written in a contract, it doesn’t mean it is always legally binding, as businesses ordinarily cannot rely on unfair terms.

Only in certain circumstances can businesses keep your deposit or advance payments, or ask you to pay a cancellation charge.

If you cancel the contract, the business is generally only entitled to keep or receive an amount sufficient to cover their actual losses that directly result from your cancellation.

This could include costs already incurred or loss of profit.

When can a deposit be kept?

Typically, the business has no entitlement to keep any amount that can be saved by finding another customer, or cancelling any other suppliers they’ve employed. That would likely constitute an unfair contract term under the Consumer Rights Act.

For example, if you booked a holiday which then sells out and the company finds another customer to take your place it’s likely the only amount it can legitimately withhold from your deposit will be administrative costs.

But, if you cancel at unreasonably short notice and the business can’t find another customer you could expect the business to keep most - if not all - of your deposit.

A breakdown of expenses

Which? recommends that you ask the business to explain how it calculated the amount it is keeping or charging you for cancelling the contract.

Was it a genuine reservation fee?

If the deposit you paid was a reasonable and genuine reservation fee and not an advance payment, it may be kept by the business as a payment for that reservation.

But, importantly, in most cases such deposits will only ever be a small percentage of the overall price.

Challenge unfair terms

The Competition and markets Authority (CMA) advises businesses to consider the following to avoid potential challenges of unfair terms from customers:

  • a deposit is just to reserve the goods or services and is no more than a small percentage of the total price
  • advance payments reflect the business’ expenses, and leave customers with a reasonable amount still to pay on completion
  • customers do not lose large advance payments if they cancel, in all circumstances
  • it's best practice that businesses set sliding scales of cancellation charges so they cover their likely losses directly from the cancellation

Do I have to pay a cancellation charge?

A cancellation charge is similar to a deposit, but instead of paying up-front, you agree to pay a fee if you cancel the contract.

But, it is not necessarily fair just because it is in the contract you signed. If you are faced with a cancellation charge, it needs to be reasonable.

Cancellation charges should be a genuine estimate of the business’ direct loss. So you’re clear on any costs, you may want to query the cancellation charge and check when it would apply before signing a contract.

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