When purchasing a property, the agent and the vendor will usually require that you pay a deposit under the Agreement for Sale and Purchase before the settlement of the purchase. The deposit amount varies but generally is approximately 10% of the total purchase price.

The deposit which the purchaser pays to the vendor under the Agreement is a part payment on the purchase price. The deposit is an early part payment as a sign of good faith and proof that the purchaser does have some money for the purchase.

When it is payable will depend on what is written in the Agreement. However, it will usually be payable either on the Agreement being entered into or on the Agreement becoming unconditional.

When entering into an Agreement for Sale and Purchase, you must always carefully read the particular Agreement to know what your obligations are, and take legal advice if you are unsure.

Under a standard Auckland District Law Society Agreement for Sale and Purchase Eleventh Edition 2022 (2) the default provision is that the deposit is payable upon the agreement being entered into, to the vendor or the vendor’s agent who holds it as “stakeholder” until the later of:

• The Agreement becoming unconditional;
• The requisition period of the Agreement (where the purchaser can raise legal issues with the title) has passed with no objection being raised as to the vendor’s title (usually 10 working days after the date of the Agreement);
• The 10 working day period that the real estate agent is required to have held it having passed (if it is paid to the real estate agent);

Note that there are additional holding requirements if the property is a Unit Title.

Once those requirements are met the “stakeholder” no longer has to hold the deposit.

So what happens to the deposit?

The most common scenario is that the deposit is used by the agent to pay their commission and any remaining balance is given either directly to the vendor or to their lawyer, as it is an early part payment of the purchase price. The vendor can generally do whatever they want with that money once it is released to them, depending on whether there is a mortgage to repay or not.

So what happens if you as the purchaser fail to complete the purchase of the property?

There are some interim measures such as penalty interest that the vendor can charge if it is the purchaser’s fault that the sale did not complete, however ultimately if the purchase isn’t completed at all then the vendor is entitled to keep the deposit.

But what if the failure to complete the sale is the vendor’s fault?

If it is the vendor’s fault and you have the Agreement validly brought to an end, then you are entitled to that money back.

A vendor may default on settlement for a variety of reasons. However, the most likely scenario is that the vendor needs any bank with a mortgage over the property (“the mortgagee”) to agree to release that mortgage. The mortgagee will not agree to release their mortgage unless there are enough funds from the sale to pay them.

An interesting fact for anyone who owns a property and has a mortgage, is that you are meant to get the bank that has a mortgage over the property to agree to you selling or disposing of your interest prior to doing so. This is a term of most loan agreements with banks and can usually be found in the document called Memorandum of Mortgage.

If the vendor is not able to pay the mortgagee what is being demanded then they cannot transfer the property to the purchaser and will be in default under the Agreement.

In practice it is not usually an issue where the bank is not aware of the sale prior, as most of the time the vendor is able to pay any lending that the bank requires be repaid from the sale proceeds and/or has other security available for the bank. The unfortunate predictions for a recession may mean it is more likely that some vendors are less likely to get mortgagee consent to a sale now.

If there are issues with the vendor transferring the property, and the vendor has used the deposit funds or is refusing to repay the deposit, you may need to take legal action to get the funds back and you could be competing with other creditors that the vendor owes money to.

How could you try to avoid this problem?

Fully protecting your deposit means you would need to insist that certain changes be made to the standard Agreement so that the deposit cannot just automatically be released to the agent and the vendor. Some possible changes are:

1. That the deposit has to be held by the vendor’s lawyer as stakeholder until settlement (unless settlement does not occur due to the purchaser’s default in which case it can be released to the vendor).
2. That the deposit has to be held until settlement but can be released earlier if the vendor provides a written letter from their bank confirming that the bank consents to the sale and that the bank consents to the funds being released to the vendor.
3. No deposit be payable. This could be palatable to the vendor is there is not a big gap between entering into the Agreement and settlement.

If you want to protect any deposit you are paying under an Agreement for Sale and Purchase we recommend you take legal advice from an experienced legal adviser.

 

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Andie Donnelly

Property Lawyer
Wellington