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The vendor wants it, the agent wants it more and the buyer cannot find it. Is it important? Jonathan Gillard, partner with the Christchurch Lawlink firm of Wynn Williams & Co, looks at the issues and tells us why collecting a deposit is so important to the vendor.
What is a deposit?
The payment of a deposit in an agreement to buy property is a sign of good faith on the part of the buyer that he or she will do what the agreement says. If the purchase is completed the deposit will be credited to the buyer as part of the purchase price. If the purchase does not go ahead, then the deposit may be forfeited to the vendor. The obligation to pay a deposit arises solely out of the agreement. That is, there is no law saying a buyer has to pay a deposit; it is what the parties agree to.
The amount of the deposit is a matter for negotiation between the parties, but the customary figure is 10%. This, however, can be an onerous amount for some buyers to find if the purchase price is high. A lower percentage may be negotiated depending on the circumstances.
A vendor should be cautious if seeking a deposit in excess of 10% as this may be construed by the courts as a penalty and the vendor may lose the right to forfeit the deposit.
To whom is the deposit payable?
The deposit is payable to the vendor or the vendor’s agent. If the agreement is conditional, then, under the Auckland District Law Society standard agreement (the ADLS form), the vendor or the real estate agent holds the deposit until the agreement becomes unconditional or is avoided (avoided means that the contract does not proceed because its conditions have not been satisfied).
It is always preferable where an agreement is conditional for the deposit to be paid to someone else (a “stakeholder”) such as the vendor’s real estate agent or solicitor rather than directly to the vendor.
If the agreement is validly avoided by the buyer then the stakeholder must return the deposit in full to the buyer. If the agreement becomes unconditional, then the stakeholder will pay the deposit to the vendor and it will be credited as part of the purchase price.
When is the deposit payable?
Under the ADLS form of agreement, the deposit is payable immediately both parties sign the agreement unless the agreement states otherwise. It is quite common for the agreement to state that the deposit is not required until the agreement becomes unconditional. This is inserted for the benefit of the buyer. From the vendor’s point of view, such a clause is not recommended. It means the vendor will have little recourse if he or she believes the buyer is not being honest when saying the conditions of the agreement have not been satisfied. If a deposit has been paid, the vendor can ask the stakeholder to hold the deposit until the matter has been resolved. Then the stakeholder will have to hold the deposit and not return it to the buyer. The possibility of losing a deposit can help focus the buyer’s mind, ensuring that he or she acts in good faith.
What happens If the buyer does not pay the deposit?
Under the ADLS form of agreement, if the buyer does not pay the deposit when it is due, the vendor may give the buyer three working days’ notice in writing that the vendor will cancel the agreement. If the buyer does not pay the deposit within the three working days, the vendor can cancel the agreement. If, however, the sale is through a real estate agent, the vendor may still have to pay the agent’s commission.
What happens If the buyer cannot complete the purchase?
If the agreement has become unconditional and the buyer does not complete the purchase, then the vendor can cancel the agreement and keep the deposit subject to the real estate agent’s commission. This right to keep the deposit will be in addition to any other rights the vendor may have to sue the buyer for any loss, for example if the property is re-sold at a lower value. If, however, the property is re-sold at a higher value, the vendor can still keep the deposit. The likelihood of the real estate agent deducting its commission from the forfeited deposit is a very good reason why the deposit should at least cover the vendor’s agent’s commission.
The deposit is a powerful weapon in the vendor’s arsenal, but not requiring one is equally powerful to the buyer. It is therefore recommended that the vendor always insists on the payment of a deposit, preferably as soon as the agreement has been signed. The deposit should at least be sufficient to pay the vendor’s expenses on the sale, including the real estate agent’s commission and legal expenses incurred. If the agreement is conditional, then the deposit should be held by the vendor’s agent or solicitor as a stakeholder.