A deposit under a contract for the sale and purchase of land is paid at the time of exchange of contracts and is a sign of intent by the purchaser to complete the contract. Generally, the deposit is paid into the trust account of the vendor’s Real Estate Agent or Solicitor and is released following settlement.
However, in recent times, we have seen an increase in release of deposit clauses included in contracts for the sale and purchase of land. A release of deposit clause allows the vendor to access the deposit paid by a purchaser following exchange and prior to settlement. Usually, this is to allow the vendor to pay a deposit or stamp duty on the purchase of a new property. For off-the-plan projects, the developer may request the early release to assist with project funding.
In most cases, the matter proceeds to settlement and the early release of deposit is not an issue but what happens when things go awry and the matter does not settle?
Recently, Ralan Group, one of the nation’s largest property developers went into voluntary administration. Prior to them going into administration, thousands of purchasers had agreed to release their deposits. Now, these purchasers, including many first-home buyers, are at risk of losing their entire deposits.
The release of deposit prior to settlement is generally discouraged as it becomes extremely difficult to recover when the matter is not completed. The purchaser would, in most cases, need to initiate legal proceedings against the vendor to recover their deposit – an extremely protracted and expensive exercise. Even then, chances of recovery are limited as the right to recover the deposit falls behind any secured creditors including the vendor’s mortgagee.
To avoid risking their deposit, purchasers should always seek to remove any release of deposit clause prior to exchange of contracts. If the vendor insists on a release of deposit clause being included in the contract for sale and purchase of land, it is prudent to assess the financial risk and ensure that the clause is carefully drafted to reduce the risk to the purchaser.