Split deposit clauses – enforceable or not?

What happens when less than a 10% deposit is paid on exchange and a purchaser fails to complete the Contract?

Over the years there has been a lot of discussion around this question and it has been seen as a bit of a grey area, we have blogged about this topic in late 2016.

Thinking about a deposit as a ‘genuine’ deposit, being a payment which demonstrates a commitment to complete the contract as compared to whether the enforcement of payment of the balance of the full 10% deposit amounts to a penalty appears to be the way the Courts will interpret the matter (and therefore not enforceable).

The position is clear that a genuine 10% deposit is forfeited on a purchaser’s failure to complete and this is not seen as a penalty. Rather, this is seen as a true deposit and for a reasonable sum.

However, special conditions which include ‘top up’ deposit clauses may fall foul of the penalty rule, depending on how they have been drafted.

  • Vendors should be advised by their lawyer/conveyancer that if they accept a 5% deposit on exchange (or something less than 10%), they may not be entitled to the balance up to 10% if the purchaser defaults.  Why?  Because the enforcement of such a clause may be treated by the Courts as a penalty and be struck down.
  • Recent case law now suggests that where the balance of the deposit is payable on default of the Contract by the Purchaser it will be treated as a penalty and not enforced.
  • Even further, it is likely that a clause requiring payment of the balance on completion may be characterised as a penalty.

Careful drafting of split deposit clauses may allow a Vendor to recover up to 10% of the purchase price, provided it still retains the characteristic of being a true deposit.  Accordingly, a Vendor must understand the implications of accepting a reduced deposit; if the Purchaser defaults, it is likely that only the deposit amount paid by the Purchaser may be forfeited (although the vendor retains its other rights to sue for damages).

If you are a Vendor wondering if you should accept less than a 10% deposit on exchange or you’re a purchaser faced with this sort of a clause in a contract for a property you are interested in buying; call us today, we can assist and explain the process with you.