Release of deposit clauses – what are the risks?
‘Release of deposit clauses’ are becoming increasing common in property transactions today. A release of deposit clause allows a vendor of a property to have ‘early access’ to the 10% deposit prior to settlement.
This is usually to enable the vendor to, in turn, put a deposit down on another property that it wishes to move into. It can have other purposes to, for example, to pay out a land tax charge prior to settlement or stamp duty on the purchase of a new property.
Whereas a decade ago very few solicitors would ever entertain a release of any part of the deposit prior to its settlement, today they are almost becoming a necessity given how high property prices have risen, particularly in Sydney. That is, increasingly fewer people have ready access to a 10% (or even 5%) deposit to purchase a new property without accessing equity in their homes.
What are the risks?
The risk of releasing a deposit prior to settlement for a purchaser is not necessarily that the deposit will be lost by the vendor’s misadventure.
Even if a vendor loses a 10% deposit at the casino prior to settlement, this will not necessarily affect the purchaser so long as the vendor can still give good title to the property at settlement.
Where the risk usually comes in is if the vendor’s property is so highly leveraged that the mortgagee’s charge cannot be discharged at settlement without recourse to funds other than the purchase price. If the mortgagee is unable to get paid out and settlement fails, the purchaser is left without a property and, if the deposit has been lost, without its deposit too.
How do you manage the risks?
If a purchaser is being asked to accept a release of deposit clause, it would be prudent for the clause to specify;
That the deposit can only be released for the purchase of another property in NSW;
- The deposit so released must only be released into either the trust account of a solicitor or a licenced real estate agent or, where the deposit is used to pay land tax or stamp duty, to the account of a government agency;
- That when the deposit is so applied, that the purchaser is provided the front page of the relevant contract for sale, or in the case of the payment of stamp duty or land tax, the relevant assessment notice or duty statement;
- In the case that a deposit is released for a deposit on another property, there is a strict undertaking that the vendor will not permit the deposit to be further released.
Most release of deposits will have these features already incorporated. It may also be prudent to limit the deposit being released to a specific sum (e.g. 5% of the deposit) and require the vendor to represent the amount of debt on the property as a percentage of the purchase price.
Occasionally a deposit is required to be released for general purposes. Whilst it is not advisable to agree to such a clause, if it is non-negotiable from the vendor’s perspective and the transaction has to proceed, a buyer should make actual inquiries about the extent of mortgages on the property (e.g. requesting loan statements) and other charges (e.g. outstanding land tax). It would also be extremely important that a caveat is placed on the property to prevent further interests being registered before settlement.
Whereas releases of deposit were very rarely agreed to 10 years ago, they are almost becoming a necessity in today’s property market given where prices are at. Whilst there are several risks associated with these, these risks can be managed with careful drafting and financial disclosure.
If you have any further questions about this, please do not hesitate to contact your team at Shore Legal who will be able to assist.