Many clients who are selling property come to us and ask us whether or not they should accept a 5% deposit (rather than the standard 10%) on exchange of contracts. Many clients who are buying property also only want to pay a 5% deposit on exchange of contracts.
Up until recently, there have been two schools of thought around what happens if a Purchaser cannot complete a Contract where a 5% deposit has been paid: does the Vendor keep only the 5% deposit or is the Vendor entitled to a full 10% (a special condition has been inserted to the effect that if the purchaser fails to complete the Contract the Vendor will then be entitled to recover the additional 5%)?
It has always been our opinion that recovery of the extra 5% may be tenuous at best. The theory being that the courts may hold this clause void as a penalty.
A recent judgment of the Supreme Court of NSW has just been handed down to the effect that a clause requiring payment of an additional 5% on breach of the Contract is in fact a penalty.
The important thing to remember is that if as a Vendor you accept 5% of the purchase price as a deposit with another 5% payable in the event that the Contract is terminated, it is unlikely that you will be able to obtain that further 5%. Ultimately, if you want to recover 10% of the purchase price in the event of default, ensure that you obtain that 10% on exchange of contracts. Another issue for purchasers to consider when it comes to deposits is whether the deposit should be released. You can read about the dangerous release of the deposit over here.
Click on the link below if you want ClickLaw to assist you through the conveyancing process, including whether or not less than a 10% deposit should be payable on exchange of contracts.