Gardner Leader

Deposits

30th August 2007

Property Transaction Deposits

Stuart Durrant, Conveyancing Partner at Gardner Leader Solicitors, clarifies the situation regarding the payment of deposits in relation to property transactions; an area that often causes confusion to the parties involved.

When you buy a house you are normally required to pay a deposit. This is a simple concept but, unfortunately, a common misunderstanding is that the deposit is the difference between your mortgage and the purchase price. This is not necessarily the case – the deposit is simply an agreed sum paid on exchange of contracts which may be any amount, but if you do not go ahead this sizeable sum can be forfeited by the seller.

The starting point is that the buyer will be required to pay a deposit of 10% of the purchase price on exchange of contracts. This is not a legal requirement, but a provision in the Standard Conditions of Sale used by solicitors in the vast majority of transactions.

The 10% deposit however has not kept pace with high house price inflation. With many properties now costing over £200,000.00, a £20,000 deposit can be a tall order, especially for the first time buyer wanting to climb onto the first rung of the property ladder. If my client does not have access to a full 10%, the seller can sometimes be persuaded to accept a lower deposit, and typically I ask for 5% as a starting point for my clients. Some first time buyers may have no deposit as they are getting a 100% (or more) mortgage and it may be that we have to agree that no deposit is payable, or alternatively arrange for completion and exchange to take place simultaneously.

It is of course easier if you are buying and selling a property at the same time as it is standard practice to use the deposit paid to my client on his/her sale of their existing property, to fund the deposit on the related purchase. For example, if my clients are selling a three bedroom property for £265,000.00 and are purchasing 4 bedroom property for 365,000.00, they can use up to £26,500.00 as a deposit. Although this is not 10% of the related purchase price, often the seller will be able to accept the lower than 10% figure. In a conveyancing transaction involving a large chain, the deposit from the purchaser at the bottom can be sent to the top of the chain to help fund the deposit of the purchaser at the top. Occasionally this purchaser may be required to top-up this contribution depending on how much has been sent up the chain.

So why is a deposit required? Essentially the payment of a deposit by the buyer to the seller is a sign of “good faith” on the part of the buyer in that that he has contributed a significant sum. This contribution acts as a reassurance to the seller that the buyer fully intends to honour his obligations to purchase the property under the contract, and that the deposit may be forfeited by the buyer if he defaults on the purchase.

Even if the deposit paid is actually less than 10%, most contracts usually stipulate that the buyer will forfeit 10% of the purchase price even if he has contributed a lesser sum.

The buyer will often query: “What if the seller pulls out of the sale and runs off with my deposit?” This is a legitimate concern and to avoid this scenario the seller’s solicitor will hold the deposit as a “stakeholder”. This means that the solicitor will hold the deposit in their client account and the deposit will be paid to the vendor, together with the balance of completion monies, on completion of the sale.

Finally the deposit required for exchange should not be confused with a preliminary deposit, e.g. from a developer who will usually require a deposit of say £500 to reserve a plot on a new development. In this situation an Estate Agent may ask a prospective buyer for a preliminary deposit as indication of good faith in a transaction.

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