Is this the end of split deposits?
In markets where prices are booming, it’s not uncommon for potential purchasers to request 5 per cent deposit options through either installments or by the contract completion date, but a recent judgment highlights the risk of these deposit options.
The expectation of vendors is, of course, that regardless of these arrangements, they will receive a full 10 per cent deposit if a purchaser fails to complete the transaction.
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However, a recent judgment in the NSW Supreme Court has revealed that property vendors who allow purchasers to split deposits into two or more payments might be inadvertently reducing their entitlement to the full deposit in the event that a purchaser fails to complete the transaction.
In Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504, the 10 per cent deposit was to be paid in two instalments: 5 per cent on exchange and 5 per cent upon completion of the contract.
Ultimately, the purchaser failed to complete the contract and the Supreme Court ruled that the vendor was only able to keep 5 per cent of the initial purchase price instead of the anticipated 10 per cent, resulting in the vendor being eligible to receive $850,000 less than they had anticipated.
The Supreme Court decided that deposits fall into the category of being “an earnest to bind the bargain” or a “guarantee that the purchaser means business”, and therefore can’t include payments that are to be made on completion of the contract.
The court reasoned that as the vendor could potentially default and still claim payment of the balance of the deposit, the second instalment was a penalty for breaching the contract, and was therefore unenforceable and void.
In light of the Kazacos case, vendors need to take care that deposit clauses are expertly drafted by a property lawyer or licensed conveyancer to ensure they are enforceable.
My three top tips for vendors are:
1. Make sure deposit clauses do not require payments to be made on completion/settlement of the contract or they may be classed as a penalty and will be unenforceable and void according to the law.
2. Make sure the deposit percentage on the front page of the contract relates to the total deposit (usually 10 per cent.) that you expect to receive, regardless of any individual arrangements you make with the buyer.
3. Avoid referring to a unique deposit clause as a ‘reduced deposit’ as courts may consider that the deposit has been reduced from the amount specified on the front page of the contract.
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