When it comes to property law and property contracts, paying a deposit is a common occurrence in buying a property, But when is a deposit, not just a deposit? The deposit acts as security for the seller and is usually part of the overall purchase price, typically upon the exchange of contracts.
What is a normal deposit for a property?
Typically, a deposit in a property purchase is set at 10% of the purchase price, which can be a substantial amount. This deposit is usually paid to the seller upon the exchange of contracts as a partial payment towards the overall purchase price.
It’s important to be cautious when a seller requests a deposit that exceeds 10%, as it may not be legally enforceable. Such a request could be considered a penalty on the buyer, and may not hold up in court. It’s advisable to carefully review and question any request for a deposit amount that exceeds the customary 10% in property transactions.
Why do sellers prefer bigger deposits?
During uncertain times, such as the current period with the cost of living crisis. a seller may request a substantial deposit from the buyer to ensure that only serious and well-prepared buyers proceed. This request may be considered reasonable and justifiable if challenged, but if the deposit is over 10%, it may be deemed a contractual penalty and void.
- Higher deposit amounts can indicate a serious buyer who is committed to the purchase.
- A larger deposit can give the seller some assurance that the buyer has the financial resources to complete the purchase.
- A bigger deposit may also give the seller a sense of security that if the buyer were to back out of the deal, the deposit would cover some or all of the seller’s expenses and losses.
Which ones may be considered contractual penalty and void:
- A deposit that is disproportionately high in relation to the purchase price may be considered a contractual penalty and could be voided by a court.
- A deposit that is non-refundable, regardless of the buyer’s reasons for backing out of the deal, may also be considered a penalty and could be voided.
- Any terms that attempt to limit the buyer’s legal rights or protections, such as requiring the buyer to pay a penalty for cancelling the deal or not allowing the buyer to obtain an inspection, could also be deemed unenforceable by a court.
What is classed as a buyer penalty?
A buyer penalty is a provision in a purchase contract that obligates the buyer to pay a fee or penalty for failing to complete the transaction or for breaching the terms of the agreement. The amount and conditions of the penalty may vary depending on the specific terms of the contract and the applicable laws.
Earnest Money
An initial deposit made by the buyer to show their commitment to the transaction. If the buyer backs out of the deal without a valid reason, they may forfeit this deposit.
Default Penalty
A fee or penalty assessed against the buyer if they fail to meet certain conditions specified in the contract. For example, if the buyer fails to secure financing within a certain timeframe, they may be required to pay a penalty to the seller.
Liquidated Damages
A predetermined amount that the buyer agrees to pay the seller if they breach the contract. This amount is typically calculated as a percentage of the purchase price and is intended to compensate the seller for any losses incurred as a result of the breach.
Completion of work on a property.
It’s important to note that if a seller intends to carry out any work on the land before completion or incur significant costs that cannot be recovered if the sale falls through, they may want to consider a higher deposit. However, careful drafting of sale contracts may help ensure that the deposit is enforceable. Taking a standard 10% deposit is generally a safe option for sellers who wish to forfeit the deposit if the buyer fails to complete.
Should you ask for a higher deposit from a buyer?
Ultimately, a seller may decide that the leverage of holding a higher deposit outweighs the risk of being sued if they forfeit it upon non-completion. However, if a seller demands a deposit exceeding 10%, they may face challenges and could be held responsible for returning the entire deposit, including any amount above the standard 10%. Therefore, it’s important for sellers to be aware of the potential risks and legal implications associated with demanding a higher deposit in property contracts.
This week’s blog has been written by Associate Solicitor Richard Flounders, who joined Jacksons in August and is based in our Dispute Resolution and Debt Recovery department in our Tees Valley office.
Richard Flounders Associate Solicitor, Dispute Resolution and Debt Recovery.
E: rflounders@jacksons-law.com
T: 01642 356500
