Payment of Deposit
Under the Terms of Contract for Buyers of Residential Property
In the majority of Contracts to buy residential property, the Seller will require that the Buyer pay a Deposit. The Deposit is a small fraction of the Purchase Price and shows some commitment that the Buyer is serious about purchasing the Property. It seems pretty basic – the Buyer pays an agreed amount. That amount sits in an account not to be touched again until either the Contract is terminated or settlement is completed. Easy, right? Mostly it is easy, but there are some traps that you can be caught by, if the terms for payment of the Deposit are not complied with.
This blog will explain why the Deposit is an important (but often overlooked) key term of any Contract to buy residential property. It will also address some common questions we are asked regarding the Deposit and will aim to make sure that your next transaction does not become complex simply because the Deposit payment terms were not followed.
When is it due?
The due date for payment of the Deposit should be negotiated before the Contract is signed. The standard wording of the REIQ Contract suggests the Deposit will be due on the date the Buyer signs the Contract. It becomes difficult to track this, and can become problematic if bank transfer issues arise such as the Deposit being paid into the wrong account.
We generally suggest the Deposit should be 3 Business Days after the Contract Date. This date can be easily calculated, which gives certainty to all parties as to the due date for the Deposit. It also gives extra time to fix any potential bank transfer issues.
How much should I pay?
The Deposit can be any amount that is negotiated before the Contract is signed. The most common amount for a Deposit is $1,000.
The Seller will want to have a higher Deposit amount because this will show that the Buyer is serious about purchasing the Property. If the Buyer commits a serious breach of the Contract, the Seller can claim the Deposit. A higher Deposit will make it less likely a Buyer will pull the pin at the last minute, because there is more money at risk.
The trap here is that the Deposit should not be more than 10% of the Purchase Price (20% for Off the Plan Contracts). If the Deposit is more than that, the Contract will become an “Instalment Contract”. Instalment Contracts are a topic for another day, but at this stage all that needs to be said is in 99% of cases you do not want an instalment contract.
Who do I pay the Deposit to?
The Deposit should be held in a Trust Account, so that it is covered by trust legislation. Usually the Selling Agent will have a trust account, so they can hang onto the Deposit.
If the Selling Agent doesn’t have a trust account, then the Seller’s Lawyer can hold the Deposit. If they don’t have one, the Buyer’s Lawyer can step up to the plate. If they don’t have one, just give up. We’re kidding – in that case the Deposit will be held in an account that will be set up specifically to hold your Deposit. This rarely happens though, and Briese Lawyers operate a Trust Account so if we are acting for either party in the transaction then the Deposit can be held by us. We promise to take great care of it.
What happens if I don’t pay the Deposit on time?
Strictly speaking, late payment of the Deposit is a substantial breach of the Contract. The Seller can terminate the Contract and claim the unpaid amount as a liquidated debt (or if you paid it after the due date, the “paid” amount). In practice, everyone is pretty casual when it comes to late payment. That said, there are some cases where we have been instructed to terminate a Contract and claim an unpaid Deposit. It’s not a fun situation to be in, so just pay the thing on time and avoid the stress.
Who ultimately receives the Deposit?
This question depends on what happens to the Contract, so we’ve broken it down into some different scenarios:
- Contract Settles: the Deposit will be deducted from the purchase price at Settlement, and the Seller will keep the Deposit. In practice, the Selling Agent usually keeps it and reduces their commission by the amount of the Deposit, or refunds the Deposit if there is some leftover after payment of the commission. This explains why the Selling Agent keeps it in their trust account. It’s much cleaner this way.
- Contract is Terminated – no breach: the Buyer will receive the Deposit back. Sometimes the Buyer can’t quite get Finance. That’s ok, it happens. The Seller will give the Buyer their Deposit back and move on to the next Buyer. No hard feelings.
- Contract is Terminated – substantial breach: Uh oh. This one is bad – something went wrong and there are probably some bad feelings floating around. Whoever committed the breach loses the Deposit and it is given to the other party.
- Contract is Terminated under cooling-off provisions: If you terminate the Contract under the cooling-off period, the Seller can charge you a penalty of 0.25% of the Purchase Price. That penalty can be taken straight from the Deposit. In fact, that penalty can only be taken from the Deposit. This means that if you haven’t paid the Deposit, the Seller can’t charge that penalty.
- Contract is never formed: You’ve been negotiating terms and you paid the Deposit early. That’s ok. If you can’t agree to terms with a Seller (maybe that cashed-up couple you saw snooping around the open house were willing to pay more) and the Contract is not formed, you will get the Deposit back.
We will leave you with some very general advice, which we hope you will find helpful:
Pay on Signing
This could be both very good, and very bad, advice depending on your circumstances, so please carefully consider this advice. If you pay the Deposit straight away but decide to terminate the Contract during the cooling-off period, you can wave goodbye to your Deposit. On the flip side, if you don’t pay the Deposit straight away and you miss the due date, you’ll have debt collectors on your tail until you pay it.
Our advice here is that if you’re sure this is the Property for you, pay that Deposit and move on to bigger and better things. Like booking your Building and Pest Inspections, or meeting with your Finance Broker/Banker. If you’re not so sure about whether this is the Property for you, try to negotiate a longer timeframe for payment of the Deposit before you pay it, then hold off on paying the Deposit for as long as you can (just don’t miss the due date!).
Bank Guarantee/Deposit Bond
If the Seller wants a large Deposit but you don’t have the cash, you can ask your bank to provide what is known as a “Bank Guarantee” or a “Deposit Bond”.
This is effectively a promise from your bank to the Seller that if at any point the Deposit becomes payable to the Seller, your bank will pay the Deposit to the Seller. The bank then takes the money from you, so the Seller doesn’t have to.
As you can imagine, banks don’t give away Bank Guarantees lightly, so at the very least you will need to have some equity built up (sorry First Home Owners). You will also need to negotiate a longer timeframe for “payment” of the Deposit, because the bank will take some time to have the required paperwork prepared.
Where a Bank Guarantee or Deposit Bond is involved, the Deposit won’t be deducted from the purchase price. You’ll need to factor this in to your loan.
We strongly suggest you take legal and financial advice that is specific to your situation before you embark on paying the Deposit with a Bank Guarantee or Deposit Bond.
Investment of Deposit
The REIQ Contract allows the parties to invest the Deposit in an interest-bearing account.
If you are required to pay a large Deposit, have a lengthy time between the Contract Date and Settlement, and would prefer not to obtain a Bank Guarantee or Deposit Bond, you can ask for the Deposit to be invested.
We suggest you don’t do this with smaller Deposits or short settlement timeframes, because the cost of bank fees payable to invest the Deposit and pull it out of that investment account before maturity might outweigh the interest earned.
The REIQ Contract stipulates that any interest earned on the Deposit will be given to the party that is entitled to the Deposit (see previous comments regarding who is entitled to the Deposit)
Contract Deposit vs Bank Deposit
As a Buyer, you might have heard your bank talk about a Deposit when calculating how much money you can borrow. It is important that we point out the “Deposit” you pay to the bank is separate to the Deposit you pay to the Seller.
We hope that this blog has given some insight into the important of paying the Deposit on time. It is a very easy part of the Contract to dismiss, but as you can see it can become quite technical and can cause major problems if the rules and requirements are not met.
The Briese Lawyers Conveyancing Team are always ready and willing to help with any Deposit related questions you have. Please contact the team if you have any questions or concerns.
This information is provided as a general guide only and should not be used or relied upon by any person without obtaining legal advice in relation to their own circumstances.