Deposits of less than 10% - the continuing saga

In brief - Some points for property vendors to consider to help manage their risk

It has become the norm for purchasers to ask for deposits of less than 10% particularly where prices are escalating or settlement periods are longer than the norm. In these circumstances, it is often the case that the solicitor or conveyancer for the vendor will insert a clause effectively splitting the deposit to 5% on exchange and 5% payable at some later date.

Is this effective?

Second instalment of deposit normally not recoverable, most cases show

The majority of cases have held that, where a clause seeks to recover more than the deposit paid on exchange, this will be void as constituting a penalty.

The usual clause which tries to overcome this consequence is a clause which states that the deposit is payable as 5% on exchange and 5% on completion.

As previously commented on in our article Reduced deposits and vendors' obligations to permit access, in the decision of Simcevski v Dixon (No.2) [2017] VSC 531 in September last year, the Court held that any such provision was a penalty and that the additional 5% could not be recovered.

There have been instances where the deposit has been effectively "split" and where the second instalment was due on a given date whether or not settlement has been effected (for example, in the decision of Cloud Top Pty Limited v Toma Services Pty Limited [2008] NSWSC 568 (Cloud Top) where the deposit was payable as 5% on exchange and 5% 42 days after contracts were made (being the settlement date) whether or not completion actually took place on that day.)

However, the majority of cases have held that where the deposit is payable by two instalments, the second instalment will normally not be recoverable as the vendor has elected to accept a lesser deposit on exchange and this is all that is required by the vendor to bind the purchaser to its bargain to acquire the property.

What can vendors do to protect themselves?

As noted above, there is an argument that if the arrangement is a genuine instalment of deposit arrangement, the vendor may be able to recover the second instalment of the deposit. However, this argument may be more difficult to sustain when the second instalment of the deposit is payable on or shortly before the date set down for completion.

However, if the purchaser would have the funds to pay the money prior to completion and there was an extended settlement date, then the second instalment could be payable say seven days prior to completion. Of course, time would not be of the essence in this regard, but in practice the purchaser would most likely (assuming the purchaser was going to proceed) pay the second tranche of the deposit at the same time as completion takes place or would have the funds to pay the deposit even if it negotiates an extension of the settlement date.

Secondly, if an initial deposit of 5% is accepted and the purchaser is a corporation, the vendor should insist on directors' guarantees to secure the purchaser's obligations under the contract.

The third thing that the vendor could do is to insist on a full 10% deposit but accept it being secured by way of a deposit bond or bank guarantee rather than a cash deposit if the purchaser does not have the funds to pay a 10% cash deposit on exchange.

Vendors should consider risk of accepting deposits of less than 10% on exchange

Accepting a deposit of less than 10% and seeking to recover the balance of the 10% where the purchaser defaults is fraught with difficulty. 

We are of the view that the Cloud Top decision is not likely to be followed having regard to the significant number of decisions since that case which have very clearly held that where payment of deposits that are less than 10% on exchange are accepted by a vendor, the vendor is restricted to forfeiting the deposit actually paid, and is not entitled to sue for the balance of the amount to make up 10% of the price.