As a property purchaser, it’s a big milestone to get to the point where you have saved enough money, dealt with the copious requirements of your financier, attended dozens of inspections, negotiated a purchase price, hopefully retained a solicitor to avoid the fall out of any unsuitable agent inserted special conditions and then finally signed up a contract to buy.
The next immediate call on your attention is, of course, to pay the required deposit. Doing so can be a bit nerve-wracking, and invites this question...
What if something goes wrong?
How do Deposits Work in a Home Buying Contract?
The deposit in a residential home contract is an amount you (the buyer) pay before the final purchase price is due.
Typically, it is paid into the real estate agent’s trust account or a solicitor’s trust account. Paying the deposit to a trust account like this is generally the best idea, because solicitors and real estate agents are bound by a variety of legal duties about how they must deal with that money once it is paid into their account. That means if there is an argument between the parties they can’t simply make some kind of arbitrary decision on who to release the funds to based on their own personal views. Whether it is a solicitor or an agent or agrees to hold the deposit, they are referred to as the Deposit Holder.
Commonly (though not always) the deposit will be paid in two parts:
First – an initial, smaller deposit payable immediately when the buyer signs the contract or another date as stated in the contract;
Second – the balance of the deposit, up to 10% of the total purchase price, payable once the finance and/or building and pest conditions are satisfied.
That typical situation will look something like this:
What happens next with the deposit depends on how the purchase unfolds.
If all goes well, the deposit simply sits in the Deposit Holder’s trust account, and is then applied towards the purchase price when the contract completes.
However, if the contract is terminated for some reason, then things can get less clear about what should happen with the deposit.
Of course, as a buyer, your main question is going to be this: how can I get my deposit back?
That’s what we’ll discuss here.
What Does the Contract Say?
Almost always, the end use of the deposit is going to be governed by the terms of the contract.
In Queensland, the standard co-drafted QLS / REIQ contract contains fairly straightforward terms detailing most of the if/then situations that could arise that require the deposit to be dealt with. When we use the term “standard” we mean that it is the form of contract most commonly used, but it is not the only property contract available. There is no such thing as a “standard contract” per se and it is key that buyers are aware of the multitude of rights and obligations they have in the 10 pages of terms that sit behind the Reference Schedule.
The general principles are these:
If the contract settles, the seller gets the deposit;
If the contract is terminated without default of the buyer, the buyer gets the deposit;
If the contract is terminated “owing to” the buyer’s default, the seller may choose to keep the deposit.
While most contracts go through with minimal bumps along the way, here are a few specific situations that can, and do, happen.
The Buyer Terminates under the Finance or Building/Pest Conditions
If the buyer lawfully terminates the contract because they:
could not secure finance within the timeframe given in the Contract; or
have secured approval but the terms on not satisfactory to them or
are dissatisfied with the building and pest report, acting reasonably,
then the deposit must be returned to the buyer.
Of course these examples are a little simplified, as the right for the buyer to terminate only accrues if they have discharged their obligation in the first instance. For example, the buyer must make an application to the bank within a reasonable timeframe after the Contract is signed and also arrange for a building and pest inspector to attend site if they want to properly avail themselves of the associated rights to bring the contract to an end.
The Buyer Lawfully Terminates under a Special Condition
Let’s say you had a special condition your contract that says something like “The Buyer can terminate this contract within 21 days if it is not satisfied for any reason at all with any search results it obtains”.
You then get a search that says the Queensland Government is thinking of putting a railway station next doorand decide that isn’t ideal for your toddler’s sleeping habits.
You therefore terminate the contract in accordance with the special condition.
Here, because you are not in default and have lawfully terminated, you should receive the deposit back.
The Buyer’s Bank Doesn’t Turn up to Settlement
In this scenario, everything is fine in relation to the property and, as far as you know, everything is set to go for settlement day.
Then, at around 3:30pm, you (the buyer) start getting calls from your property lawyer telling you that everyone has approved the settlement to go ahead except for your bank.
Of course, the bank is providing the money so if it doesn’t come to the party then settlement isn’t going to happen.
You make 92 frantic calls to your lender, only to find that you can’t get anyone on the phone and there is no contact number for the “settlements” department.
Ultimately, your bank does not approve the necessary transactions in time, and the day ends without settlement having occurred.
Important note – under the current standard contracts in Queensland, either party can extend the settlement date for up to five business days if they give notice before 4pm – but we’ll assume that didn’t happen or wasn’t available here for the sake of our example).
What will happen next (other than the argument you’re going to have with your bank)?
Unfortunately, the bank’s failure to deliver the correct settlement funds and allow the transaction to go through on the date of settlement counts as a default by you, the buyer.
In Queensland if the buyer does not settle by 4pm on the settlement date it is generally open to your seller to. amongst other things:
1. Affirm or terminate the contract; and/or
2. Sue for specific performance (affirmation only); and/or
3. claim the entire deposit (termination only); and/or
4. sue for damages.
What might be included as part of any claim for damages is something we’ll deal with in a separate article, but the amount can be considerable, especially in a falling market.
Importantly though, a seller does not have to actually suffer any damage to claim the deposit. So, for example, they can still terminate and claim the deposit even if they can then re-sell the property at an increased purchase price.
Whether the sellers actually decide to do that will be up to whether your property lawyer might be able to negotiate a different path, so choose your property lawyer well.
What if there is a Dispute?
Because of the high stakes and the potentially devastating personal impact of a buyer losing a deposit , if something has gone wrong with the process it’s fairly common for there to be a dispute about who is, or isn’t, entitled to claim the deposit.
We’ll deal with that process more in another article, but in short terms if there is a dispute then the Deposit Holder is generally going to pay the money into Court, where it will only be released once a Court order says what should happen. .
At that point it is left to the parties to sort out the matter, either through negotiation or litigation.
Have a Deposit Issue? Act Fast, but Get Advice
Losing your deposit as a buyer is a serious issue that could put you out of the property market for some time while you recover.
For this reason, it’s important to ensure that you are fully informed of each step you must take during the contractual process of buying a property, and that you run any questions past your lawyer if you are uncertain about your responsibilities.
Get in touch if you want a safe pair of hands to help you navigate your property purchase or help with a dispute about a deposit.
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