If you are selling or buying residential or commercial property in New South Wales, it is likely you will come across a release of deposit clause. What does this clause mean? And what risks does it present for the purchaser?
What is a release of deposit clause?
Generally, when a party enters into a contract to buy a property in NSW, they pay a deposit to the real estate agent or to the seller's solicitor, to hold in a trust account until settlement.
In these situations, the deposit is not touched by either party while it is in the trust account, until after settlement has occurred.
However, increasingly, a release of deposit clause is being inserted as a special condition in contracts, allowing the vendor access to the deposit paid by the purchaser after exchange, but prior to settlement.
This benefits the vendor, as by having access to the deposit, they are in a better position financially to pay either a deposit or the stamp duty on their next property.
It is easy to see the appeal of this clause to sellers in a hot real estate market like Sydney, with its exceptionally high prices.
Does a release of deposit clause present risks for the buyer?
There are risks associated with a release of deposit clause for the purchaser. Although these scenarios are rare, it could result in the purchaser being at risk of not getting their deposit back.
For example, if the contract "falls over" and settlement does not happen, and the deposit has already been released to the vendor, the purchaser will need to sue the vendor to get the deposit back. This can be a very lengthy and expensive exercise.
The deposit may have already been used to purchase another property and could now be in another agent's trust account, or have been paid as stamp duty. This can make it very difficult to recover the money.
Similarly, if the vendor has become bankrupt, the chances of recovering the deposit are significantly diminished.
It is for these reasons that lawyers sometimes recommend not releasing the deposit if you are the purchaser.
Should I be concerned about a release of deposit clause?
Ultimately, a release of deposit clause can be a very useful tool for vendors looking to buy their next property, and is a commonly accepted special clause in contracts.
However, deposits do involve a lot of money - particularly in the Sydney market - and there are risks for the buyer.
Therefore you should seek legal advice if you have any questions or concerns.
Deposit paid in property transactions can lead to litigation
Litigation over a deposit which has been paid in a property sale is not uncommon. This website has published numerous articles about such court disputes. Please see the links below.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.