THE RISKS IN ACCEPTING A 5% DEPOSIT

by | Mar 5, 2019 | Property Law

In todays’ property market it is has become quite common for purchasers to request the payment of a 5% deposit in lieu of a 10% deposit, which can at times be out of reach with today’s high property prices.

If agreed, the contract for the sale and purchase of land (the contract) normally contains a special condition that provides for the 10% deposit to be paid by instalments, more often than not, being:

  1. 5% of the purchase price on exchange; and
  2. the balance of the deposit at a later date or on completion.

The risk is whether the second instalment is recoverable?

Despite the inclusion of a special condition of this kind, the courts have held that if a purchaser fails to settle and the vendor terminates the contract, the vendor cannot seek to recover the balance or second instalment of the 10% deposit from the purchaser.

Based on the law as it stands, while not always practical, one solution is for the vendor to request that the purchaser pay the 10% deposit by using of a deposit bond issued by a financial institution approved by the vendor.

A deposit bond will serve to:

  1. assist the purchaser’s cash flow; and
  2. maintain the vendor’s ability to recover the 10% deposit on termination of the contract.

The vendors consent to the use of a deposit bond would need to be obtained and should also be covered by a special condition in the contract.

Before agreeing to accept anything less than a 10% deposit a vendor should obtain advice from their legal representative about the risks of doing so.

Important Disclaimer: The content of this publication is general in nature and for reference purposes only. It is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.