The essential terms of a contract for sale of residential property must all be agreed before the contract will be legally binding, otherwise, the contract may fall over on account of being void for uncertainty.
The deposit amount, how and when it is to be paid and the circumstances under which it will be refunded to the purchaser, are essential terms of a contract.
In the current market, vendors are reasonably regularly accepting 5% (instead of 10%) deposits and this amount is payable on the date of the contract.
The contract will normally require the purchaser to pay the deposit into the trust account of the vendor’s selling agent. If deposited into a trust account, the parties get the benefit of laws and insurances which cover trust accounts but no interest will be earned. Alternatively, the parties may direct the selling agent to invest the deposit monies in an interest-bearing account and the parties will normally agree to share the interest earned equally. If the deposit is 5% of the price, the vendor will sometimes insist on keeping all of the interest earned. In any event, as the deposit must be invested in a bank account payable at call, the interest rate will normally be very low (1 – 3%) and given the time and effort required to procure the required information and to complete the required forms, it’s not usually worth investing the deposit monies, unless the price is particularly high or if the settlement period is particularly long.
If a 5% deposit is agreed, the vendor will normally insert what’s known as a top-up clause into the contract. This is a clause which says that the deposit is 10% of the price, payable in two instalments: the first 5% payable on the date of the contract; and the second 5% payable upon completion or on the date on which completion should have been effected. It’s structured this way so that if the purchaser does not ultimately complete the contract when required, the vendor is entitled to terminate the contract and claim (and keep) 10% (rather than 5%) of the price.
If the contract gives the purchaser a cooling-off period (normally five business days), then if the purchaser elects to rescind (i.e. get out of) the contract during the cooling-off period, the purchaser will forfeit 0.25% of the price to the vendor and the vendor must refund to the purchaser the balance of the deposit monies paid. Assuming a purchase price of $1 million, the purchaser will be forfeiting $2,500 to the vendor in these circumstances.
For further advice on the above or on any other aspect relating to contracts for sale, please feel free to contact Natasha Goulden or the team at Goulden Legal, contact details below.
This article provides general information and should not be construed as legal advice on specific circumstances. If you want to publish any part of our article, please e-mail us for permission.