It is common for the buyer to pay the seller a token amount as a deposit to assure him that he intends to purchase the property. Such deposit money is usually 10% of the total purchase price. Although not warranted by common law or a statute, this practice is reflected in standard practice through SC 2.2.
The payment of deposit amount ensures that the buyer is earnest in his intentions. It also gives the seller a greater leverage as he is allowed to forfeit the deposit money when the buyer defaults on paying the remaining money.
Sometimes a preliminary deposit is paid to the seller before the contract is exchanged. This is because neither of the party is committed to the sale. But an estate agent may require that the buyer pay a preliminary deposit to ensure that he had all intentions to proceed with negotiation. A buyer who pays this money should ensure that the agent is authorised by the seller to receive such preliminary deposit, or else, he does not have any recourse against the seller when the agent misappropriates the money. Unlike a normal deposit, the preliminary deposit money should be returned when the deal does not go through.
Buying a newly-built house
A person who is buying a numbered plot at a stated price is often required by the developer to pay a certain amount as preliminary deposit. It is not uncommon for the sellers/developers to not return this money under any circumstances. However, the money may be adjusted as a part of the purchase price when the deal goes through.
Amount of deposit
Deposit money is not paid unless it is specifically mentioned in the contract; and the amount for such deposit is generally fixed at 10% of the purchase price (although deposit money of less than 10% is not uncommon). In fact, this is specifically mentioned in both set of standard conditions and is used unless otherwise specifically amended.
Sometimes the buyer may request the seller to accept a smaller amount as deposit money. The seller’s conveyancing solicitor may give his approval to such a request after taking into consideration several factors, some of which include:
- There exist a risk that the deal may be off and the need to forfeit the deposit money.
- The amount of the buyer’s mortgage offer matters. For instance, sometimes a less than 10% deposit offer from the buyer is acceptable if the buyer has a firm offer of advance for balance of purchase price.
- The seller is likely to suffer a huge setback if the buyer defaults on the payment. For example, the cost of bridging finance or interest needed for a related purchase, the length of time required to effect a resale and the costs of resale.
Seller’ solicitor duty
The seller’s conveyancing solicitor should make sure that he has explained all the consequences of accepting a reduced deposit to the seller. The conveyancing solicitor can be accused of professional negligence if he has not obtained necessary authority from the seller before accepting reduced deposit.
No deposit payable
It is only in extremely rare circumstances that a contract is effected without payment of deposit. Such circumstances include transactions between family members, or sale to sitting tenants. Such deposits are usually avoided in commercial circumstances under the belief that the buyer is usually of a good standing that there would be no risk to the seller at all.
Calculating the deposit
The deposit money should be calculated taking into account any money paid as preliminary deposit money. Under S.C 2.2.1, deposit money is calculated as 10% of the total purchase price, but does not include amount paid for any other content included in the sale. This is the same under SCPC 2.2.1 as well, but the term ‘purchase price’ is inclusive of chattels depending on special conditions.
Funding the deposit
The buyer’s conveyancing solicitor should make enquiries regarding the source of the deposit money. It is generally assumed at the time of taking instructions that the seller shall demand 10% (of purchase money) as deposit. The buyer who would like to request for reduced deposit can do so at a later stage during negotiations.
From an investment account
Sometime the buyer may fund the deposit money through an investment account held by him. In such a case, the notice period to be given before withdrawal of funds should be borne in mind otherwise the buyer would lose interest money.
Sometimes, the buyer is looking to finance his purchase by selling another property. In such circumstances, he may require a bridging finance from a lender. Although the buyer has funds to complete the transaction, he may be short of sufficient funds to pay the deposit money at the time of exchange of contract (A bridging finance should be obtained for this purpose).
The buyer’s conveyancing solicitor would be instructed appropriately if the deposit money is to be paid using a bridge loan. If such is the case, appropriate steps should be taken to ensure that the money is readily available at the time of exchange of contract. The buyer’s solicitor should also arrange for an undertaking from the buyer that he will repay the loan once the transaction is completed.
The buyer’s solicitor should also inform his client about the risks involved in taking a bridge loan. Risk involved include high interest rate, uncertain time period for repayment of loan if the sale goes off, and high cost of arrangement fees to be paid to the lender.
And if the buyer maintains a current account with high cash flow transactions, he may choose to take advantage of the overdraft facilities available on low interest rates.
Sometimes the buyer may purchase a deposit guarantee from an insurance company and produce it to the seller instead of money. If this is the case, the seller should be informed prior to the exchange of contract and his permission be obtained. However, the contract needs to be amended so as to include payment of deposit through deposit guarantee.
The guarantee should be of the amount as specified by the seller. The seller in turn shall be eligible to enforce the guarantee if the buyer fails to complete the transaction. Such guarantees can also be assigned through a chain of transactions, but they are not popular among sellers.
Use of deposit from related sale
A buyer who sells his existing property is more than likely to receive deposit money from that sale. This money can be used under SC 2.2.5. But if the deposit money received from that sale is less than the deposit required for the purchase of the property, he can try one of the many sources mentioned above. Sometimes under these circumstances, the buyer would try and convince the seller for accepting a lesser amount as deposit money.
Clearing the deposit amount
The conveyancing solicitor for the buyer should make sure that the deposit money is arranged for and it is sourced from the buyer’s account. There should be ample time for getting the buyer’s cheque encashed.
Photo courtesy: owenwbrown