With housing prices at an all-time high, deposits of less than 10% are progressively becoming normal.
Often, the deposit is split in half; 5% to be paid on exchange and 5% to be paid at a later date. However, in allowing this to happen, vendors rarely consider the risk in not accepting the full 10% on exchange.
In most cases, the court has not allowed a vendor to recover the post-exchange deposit instalment in the event of a purchaser’s default.
The reasoning behind this?
- the vendor has willingly forfeited their right to the full 10% deposit on exchange;
- the lesser amount paid on exchange binds the purchaser to their agreement to purchase the property; and
- any future requirement to contribute to the deposit penalises the purchaser if they do not complete the purchase.
The good news for the Vendor is that they may still be able to recover the second instalment if the second payment can be characterised as a ‘genuine’ deposit demonstrating the purchaser’s commitment to complete the contract and it is of a reasonable amount.
To facilitate this argument, the relevant special condition should provide for the deposit’s second instalment to be paid a certain number of days after exchange, ideally before completion, rather than on completion. This makes it clear that the purchaser was always required to pay the second instalment of the deposit regardless of whether they completed or terminated their purchase, indicating to the court that the second amount was not intended to penalise the purchaser for non-completion.
Typically, enforcing the second deposit instalment in the event of a purchaser’s default is a difficult endeavour. However, if the vendor is aware of the risk of non-recovery and diligent enough to minimise it, enforcing the instalment is possible.
Here are a few tips on how to minimise the risk of non-recovery:
- Insist on having the full 10% deposit paid upfront in cash, by way of a deposit bond or bank guarantee;
- If the deposit must be split, arrange for the second instalment to be paid a specific number of days after exchange and far prior to completion (NOT upon completion);
- If the purchaser is a corporation and a split deposit is arranged, insist on directors’ guarantees to secure the corporation’s commitment to complete the contract.
If you wish to discuss how best to minimise your risk as a vendor or you are a purchaser seeking advice as to your liabilities under a contract, please contact us to set up an appointment with a member of our experienced property team.