Deposit dangers: Can I lose my deposit on a house?

KEY TAKE-OUTS

Deposit risks where:

1. A Vendor goes into liquidation/bankrupt?
2. Where an early release of deposit is negotiated; and
3. Where your circumstances have the potential to change.

There are 3 very important circumstances to consider as a purchaser where your deposit is placed at risk. It is important to take these risks into consideration and mitigate them where the need arises. These circumstances include:

1. Where a Vendor goes into liquidation/ becomes bankrupt;
2. Where an early release of deposit is negotiated; and
3. Where your circumstances have the potential to change.

How much deposit do you need for a house? With rising house prices in New South Wales, the standard deposit being 10% of the purchase price can be a substantial sum especially to young people attempting to enter the market.

Who holds the deposit on a house sale? Generally, a deposit is held in the trust account of the agent or the Vendor’s Solicitor pending settlement of the matter. It can also be invested which is often the case when purchasing unregistered land due to the potentially long period between exchange and settlement of the matter and the potential for growth in this time.

1. Can the vendor keep my deposit if they go bankrupt?

Recently there have been repeated instances of builders and developers going into liquidation. We have seen some big names collapse such as Condev and Probuild. The danger for purchasers is that your deposit could potentially be tied up for a long period of time as the liquidation process plays out in some circumstances the deposit even becoming unrecoverable.

When purchasing unregistered land one way to combat this danger would be to use a deposit bond. The benefit of a deposit bond is that a Vendor would only be able to make a claim on a deposit bond if you as the purchaser were at default, they are not able to do so when they are in default themselves. As a purchaser you would then have peace of mind that your cash deposit could not be lost if a builder or developer were to enter liquidation. However, it is important to note that a Vendor could potentially deny this request.

A deposit bond is able to be used in all purchases of Real Property in New South Wales but must be indicated as acceptable by the Vendor on the Contract or negotiated between the parties.

2. Is an early release of deposit risky?

Another risky circumstance for purchasers is where they agree to an early release of the deposit. Often this is written into the contract of sale as a ‘release of deposit clause’. The Vendor is often able to release the deposit in certain circumstances. Generally, this is to do with purchasing another property or paying stamp duty. Where it is to be held in trust it is generally deemed safer than a release directly to the Vendor.

Is a release clause good or bad? In most cases matters proceeds to settlement and an early release of deposit is not an issue. This risk exists due to the fact that the deposit is no longer readily accessible once it is released if the Vendor is than to default it may not be as easy for the purchaser to reclaim their deposit and legal proceedings may need to be commenced.

It is important to closely consider the terms of any release in a contract of sale or negotiate the removal of this condition completely.

However, sometimes the deletion or amendment of the release of deposit clause in a contract will not be agreed to by the Vendor who may need the funds for a purchase of their own or for other reasons necessary to them.

3. Do you lose your deposit if finance falls through?

In the purchase of unregistered land, it is often quite a large period of time from the payment of the deposit until settlement of the matter. It is also not possible to receive unconditional loan approval until the land registers. Generally, just a few weeks prior to settlement. In the time that lapses loan pre-approvals often lapse and re approval needs to be granted. The risk here exists where a purchasers financial circumstances change dramatically from the time the time the deposit I paid until settlement is due.

If a purchaser’s financial circumstances changed dramatically the loan may not be granted. If this happened and as a purchaser, you were no longer able to settle, your deposit would be at risk. Again, a deposit bond could help mitigate this risk in the same way as described above for unregistered land.

Where you are planning on purchasing an established property you are able to get unconditional loan approval and should have this before going unconditional on a purchase where possible.

Conclusion

All of the above are calculated risks that your Property Lawyer or licensed conveyancer can walk you through. Deposits are a substantially amount of money and it is important to understand ways that you can best protect yourself. Some risks are unavoidable, and it is important to consider them and mitigate as much as possible.

For further information on deposits and how to protect yourself contact the team at Coutts.