Home buyers' deposits need a careful approach: Even if a sale is not completed the vendor may not be entitled to the down payment, warns Sue Fieldman

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The Independent Online
HOME BUYERS will be out in force this weekend. But before you agree to sell your property take heed of a recent case where a buyer successfully sued for the return of his deposit even though he had failed to complete.

It is customary for a purchaser to pay a 10 per cent deposit on exchange of contracts. If a buyer does not complete the seller automatically keeps the entire deposit.

The seller can also sue for any additional damages.

In a case that recently came before the House of Lords the purchaser was buying some land in Jamaica for dollars 11.5m ( pounds 7.3m). He paid a 25 per cent deposit on exchange of contracts - about dollars 2.8m.

Completion was 14 days later, with no right to delay.

The transaction did not complete on the agreed day because the purchaser wanted new conditions. But the seller rejected them and said the whole deal was off and he would be keeping the deposit.

Within a matter of days the potential buyer was ready with the money plus interest, but as far as the seller was concerned it was too late.

The House of Lords said that the seller had to return the deposit and the interest, but he could keep dollars 875,000 - 7.5 per cent of the purchase price - which was an estimate of the damage he might have suffered. A judicial inquiry would then decide the actual damage.

John Samson, property partner with the solicitors Nabarro Nathanson, says: 'The purpose of a deposit is to be a pre-estimate of loss when the other party is in breach of contract.

'In general 10 per cent is a fair pre-estimate and no one challenges it.

'But if someone pays a larger deposit it will be open to challenge, and if sellers do not make any loss at all they will have to pay back the entire deposit.'

There is now nothing to stop a clued-up purchaser offering a larger deposit than 10 per cent and taking a chance that if he is sued for failing to complete he might not lose the lot.

Mr Samson says: 'I think that this would be seen as a device. I do not think it would work'.

However, the moral of this part of the story is: sellers, beware of purchasers bearing gifts of over-large deposits.

The problem for many sellers is not over- large but over-small deposits. Many purchasers can only stump up 5 per cent or sometimes even less.

In these circumstances Mr Samson advises a seller to check out a purchaser's financial position. Confirm that the buyer really is getting a high percentage mortgage - one of the main reasons for requesting a reduced deposit - and check he has the balance of the funds.

If the buyer pays a reduced deposit, the seller can be caught short if the buyer does not complete.

The seller's solicitor should insist that there is a clause in the contract that the full 10 per cent is due and payable in the event of default.

It is obviously in the purchaser's interest to try to get this clause knocked out. You have to remember that, in addition to the deposit, the seller can also look to the original purchaser for any loss incurred on a resale plus costs.

Mr Samson says: 'If the sale price is pounds 80,000 you would normally pay a 10 per cent deposit of pounds 8,000.

'If you fail to complete and the seller sells elsewhere for pounds 70,000, he can still sue you for the pounds 2,000 that he has lost and for his legal fees. The same principle applies if you only originally paid a 5 per cent deposit.'

If you are buying a property you should also make financial checks on the seller if he asks to use your deposit on his associated purchase.

In these days of negative equity, Mr Samson advises that a purchaser should get confirmation that a seller has enough money to redeem his mortgage or that the lender agrees to the sale at this price. Otherwise the lender retains the right to refuse to allow the deal to go through.

And one final word of warning for all purchasers. The property market may be moving, but transactions can take a long time to complete.

Mortgage offers, on the other hand, are being processed at a rate of knots.

Before you exchange, make sure your mortgage offer has not expired. Otherwise you could find yourself with a failure to complete notice slapped on you by the seller through no fault of your own.

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