The Deposit

26 November 2017

A deposit under an agreement for sale and purchase is normally paid by the purchaser to show he or she is genuine in his or her desire to purchase the property - the purchaser could lose the deposit if he or she failed to complete the transaction once legally committed to do so.

The agreement

The standard agreement for sale and purchase of real estate provides for the purchaser to pay the deposit when the agreement has been signed, unless the agreement states the deposit must be paid at a different time. Nowadays most agreements are drafted to provide for the deposit to be paid when the agreement becomes unconditional. This will be when any conditions inserted in the agreement for the benefit of both the vendor and the purchaser are satisfied and both vendor and purchaser are therefore committed to complete the transaction.

The stakeholder

The agreement also states that the person to whom the deposit is paid will hold it as stakeholder. In law, a stakeholder is an independent person who holds money on behalf of others until it is decided who is entitled to the money.

In most cases the stakeholder under an agreement for sale and purchase of real estate will be the real estate agent or the vendor’s lawyer and the deposit is held in their trust account.

The agreement states the deposit must be held by the stakeholder until

  • (a) the conditions in agreement have been fulfilled or waived (in which case seller will then be entitled to deposit); or
  • (b) both parties are no longer entitled to exercise any right they might have under the agreement to validly cancel it (in which case the purchaser will be entitled to a refund of the deposit).

If the agreement does not state the deposit is payable to the agent or the vendor’s lawyer, it will be payable direct to the vendor. This could be risky for the purchaser as the vendor could refuse or be unable to refund the deposit when required to do so. For example, the vendor may have spent the deposit or it may have been paid to the vendor’s mortgagee.

The real estate agent

The Real Estate Agents Act 2008 requires the agent to hold the deposit for at least 10 working days after the agent has received it, unless the agent is authorised by both vendor and purchaser to release it earlier. If the agent receives notice during the 10 working day period that the purchaser has objected to the vendor’s title then he or she must only pay the deposit in accordance with an authority signed by both the vendor and the purchaser or in accordance with a court order.

Once the 10 working days has expired and there has been no objection to the vendor’s title, the agent normally deducts his or her commission and pays the balance of the deposit to the vendor

The agent will sometimes ask for the deposit to be released before the 10 working days has expired. This might be because the vendor needs the money - for example, to pay a deposit on another purchase. The purchaser has nothing to gain (except the goodwill of the vendor) and possibly something to lose by agreeing to an early release of the deposit. While the deposit is held in the agent’s trust account the purchaser has some leverage if there is a claim against the vendor.

The risky transaction

In some transactions it is more important than others to make sure the deposit is held by a stakeholder for as long as possible, even until settlement - for example, where the vendor is in financial difficulty, where the vendor has agreed to build on the land, or where the vendor is not yet the owner of the land.  If the deposit is held until settlement the purchaser will be sure the vendor will only receive it once he or she transfers ownership to the purchaser.

The lawyer

In most cases the deposit is a substantial amount which neither vendor nor purchaser will want to lose once they become entitled to it. Taking advice from your lawyer before you sign an agreement is the best way to ensure that your interests in the deposit are protected.

Barbara McDermott is part of our Private Client team at Norris Ward McKinnon.