In today’s show, conveyancer Garth Brown, from Brown & Brown Conveyancers, answers our questions about deposits on contracts. Amongst them… what happens if there is no deposit, what are the circumstances that would see a buyer loose the deposit to the seller and how to avoid that?
Kevin: We often think when we buy a property that the deposit is just part of the process, that’s what you have to pay. Quite often, I get asked the question, “How much deposit should I pay?” Let’s have a look at that, and we’ll also have a look at what really makes up a deposit and why it’s important to have one with every contract.
I’m talking now to Garth Brown from Brown & Brown Conveyancers. Garth, thanks again for your time.
Garth: Thanks, Kevin. I appreciate it.
Kevin: How important is it to have a deposit with a contract? Can you actually form a contract without a deposit?
Garth: No, you need to have the deposit. It’s part of a valid and binding contract. It’s known as consideration. There needs to be a deposit paid, a contract signed, and an intention to be legally bound. It’s a major part of a valid contract. It must be there. If it’s not there, you don’t have a valid contract.
Kevin: How is the deposit used? Once it has been gathered by the agent, what happens?
Garth: The agent places the deposit in a trust account. It’s held there until settlement.
Kevin: Okay Garth, so that goes into a trust account, which means it’s held in trust. It is owned by neither the seller nor the buyer at that stage. Is that correct?
Garth: Yes, that’s right. It’s held by the agent as a stakeholder, and that is just ensuring the obligations of both purchaser and vendor. When they’re completed, the deposit is released after the agent deducts their commission from the deposit.
Sometimes what happens is that part of the deposit is needed before settlement. Both vendor and purchaser conveyancers agree to have part of the deposit released before settlement so that it can be used for the property to settle. Maybe the mortgage is a lot higher than what the contract allows for, so the deposit needs to be released to help out the settlement.
Kevin: That has to be by agreement between all the parties.
Garth: That’s right. It’s very important that all parties, once a contract is exchanged, that the settlement proceeds do cover what is required at settlement to pay up the mortgagee. If not then all parties need to agree to have part of that deposit released to make sure that there is enough surplus to cover the mortgage to pay it out.
Kevin: You said earlier that it’s there to allow the settlement to happen. In a scenario where it goes all the way through to settlement, the purchasers may have a pre-settlement inspection and find that there is something not quite right. At that point, is the settlement held up, or can it still go ahead?
Garth: The object is to get the property across the line to settle. What can happen is that part of the deposit – it could be $1000 or whatever – could be held back. This would be resolved after settlement. They would just get the property to settle and then come back to sort out the smaller part of the transaction. The main objective is to get the property settled and then come back and sort out what is needed from there.
Kevin: Rather than let the sale fall over, it settles, the purchaser get its, they still get occupation, and then whatever problem needs to be sorted out with that $1000 or whatever the case may be, that’s then done.
Garth: That’s right. We had one in country New South Wales, where the hot water system was faulty. It was working at the time of the inspection, but when it came to the pre-settlement inspection, the hot water system wasn’t working. What happened there, the vendor agreed to hold back $1000 and to allow the property to settle. Then both vendor and purchaser negotiated together. They decided to replace the hot water system with that $1000 by the vendor, so it worked out really well.
Kevin: Right back at the start of our chat, you said that the deposit is paid to make it a binding contract. In the event that the sale doesn’t proceed – because maybe the purchaser can’t get their financing and has to terminate as normal – what happens to that deposit?
Garth: Particularly in New South Wales, if you don’t settle on that contract settlement date, you’re issued with 14 days notice, known as a notice to complete. If you don’t settle within that 14 days, the vendor can terminate the contract and keep your deposit, and then the vendor can go and sell the property to someone else.
Kevin: Under what circumstances can the purchaser get their deposit back?
Garth: Particularly after you have exchanged contracts and paid the deposit, the purchaser’s conveyancer would undertake checks to make sure that there are no road proposals to go through the property, or any railways, to acquire the land for education, or to put power lines through.
These sort of things affect the value of the property, and if they haven’t been disclosed in the contract, in the special conditions, before signing and you find out about these after you’ve signed the contract, then you can rescind the contract to retrieve your deposit back based on some legislation there.
Kevin: There are parts of Australia where a contract can fail subject to finance, and I know in New South Wales, you’ve explained that that is not the case, but in some parts of Australia, if it fails on the finance, for instance, the deposit is paid back to the purchaser.
Garth: Yes, as long as that condition is in the contract there.
Kevin: A lot to get through. We will come back with Garth at some future time. I do want to talk to you about agency agreements, because that is another critical area that sellers in particular should be aware of.
Garth Brown from Brown & Brown Conveyancers. Thanks for your time, Garth.
Garth: Thanks, Kevin.