Conveyancing: Depositing the deposit

In New South Wales, it is traditional for a purchaser to contribute a deposit of 10% of the purchase price on entering into a contract for the purchase of a property. But why 10%? In short, it has been held by the courts that 10% is a reasonable sum in the event that the contract is terminated as a result of the purchaser’s breach. Any more and the provision for forfeiture of the deposit may be deemed to be unenforceable due to it being deemed a penalty.

Must the deposit be 10%? The deposit can be less than 10% if the parties agree. More recently we have had many contracts that provide for a 5% deposit. The parties to the contract can also agree on a set amount (for example $5,000.00) but it is prudent to ensure that the set amount does not exceed 10% of the full purchase price.

How can the deposit be paid? The most common form of payment is by a personal cheque. With the prolific nature of internet banking many people also choose to transfer the funds by an electronic funds transfer directly to the stakeholder’s (for example the real estate agent) account. Another method of paying the deposit is by what is known as a “deposit bond”. This is essentially a guarantee provided by an insurer that the insurer will pay the deposit to the vendor in the event that the vendor is entitled to terminate the contract and recover the deposit. A premium is paid by the purchaser for the deposit bond and the original document/certificate is provided to the vendor on exchange of contracts.

In what circumstances do I get the deposit back? There are a number of scenarios in which the deposit will be returned to the purchaser. The most common is that which occurs when a contract is rescinded. This is effectively when each party walks away and the contract is then of no effect.

Is there interest payable on the deposit? Deposits are sometimes invested. Usually in some sort of term deposit or interest bearing bank account. Unfortunately for most purchaser’s the administrative burden of investing the deposit will exceed the reward by way of interest payments. This of course must be calculated depending on the dollar value of the deposit and the time between exchange of contracts and completion.

Who gets the interest on the deposit? This is a matter for the contract. It can be agreed that the interest go to one party or the other or even be split between the parties.

Who holds the deposit? The person who holds the deposit is usually referred to as the Stakeholder in NSW. If there is a real estate agent, the agent will hold the deposit in their trust account. In the event that there is no real estate agent involved in the transaction, it is common for the solicitor for the vendor to hold the deposit in a solicitors trust account.

We will address in a further blog post shortly the consequences of releasing a deposit to a vendor prior to settlement and the potential risks for doing so.

In the meantime, if you have any queries relating to the conveyancing process or property law in general, please do not hesitate to call one of the expert property lawyers here at ClickLaw.

John Kettle

Solicitor Director