Deposits – what you need to know
3 February 2017
When buying a home, handing over your deposit is a significant moment in the transaction, making the contract legally binding on both the buyer and the seller. The case of Kandola v Mirza  shows why buyers need to consider carefully how their deposit will be treated in their conveyancing transaction. In that case, the buyer lost his deposit following the seller’s bankruptcy.
Why have a deposit?
Nearly all sale contracts require the buyer to provide a deposit. Your conveyancer will send the deposit to the seller’s conveyancer on exchange of contracts. It is at this point that the sale agreement becomes legally binding.
The deposit acts as part-payment of the purchase price and confirms your intentions to the seller. If you default on the agreement, you risk forfeiting your deposit and the seller may be entitled to keep the whole amount.
The size of the deposit
Most residential sale contracts use the standard conditions of sale. These provide for a deposit of 10 per cent of the purchase price.
You are free to agree a different percentage with the seller. Deposits of less than 10 per cent have become more widespread due to increasing property prices and the popularity of 95 per cent mortgages.
However, if you propose to offer a reduced deposit, discuss this with your conveyancer at an early stage. The seller will need to be satisfied that the deposit will still provide adequate compensation should the sale fall through. Making your intentions clear at the outset, and showing you will have sufficient funds in place at completion, should alleviate any concerns.
Funding the deposit
Be clear early on about how you will fund the deposit.
The standard conditions of sale require payment of the deposit through a conveyancer’s client account. Remember to allow enough time for funds to clear through your conveyancer’s account before the anticipated date of exchange.
If you plan to use money held in an investment account, consider how much notice you need to give. It may be worth transferring sufficient funds to a short-term investment account so that they are available on exchange.
You may be able to use the deposit from a related sale towards the deposit for your purchase, but this will depend upon the terms of the contract. Bridging finance is another possibility. However, this can be risky, particularly if your related sale does not proceed.
Sending the deposit on
Following exchange of contracts, the seller’s conveyancer will hold the deposit as either stakeholder or agent for the seller.
A stakeholder holds the money on behalf of both the seller and the buyer. The stakeholder can only hand the money over to either party when completely satisfied of that party’s entitlement. In most cases, this will be to the seller on completion.
For you, as buyer, this is the safest way of dealing with the deposit. However, holding the deposit as stakeholder means the seller cannot use it towards his deposit in a related purchase.
In contrast, a conveyancer who holds the deposit as agent for the seller may hand over the money to the seller before completion of the sale. The seller can then use that money towards the deposit on his own purchase. However, you may have problems recovering your deposit if the seller defaults on completion.
Unfortunately, this is what happened to the buyer in Kandola v Mirza . Acting against his solicitor’s advice, Mr Kandola agreed that the seller could use the deposit to fund another purchase. The seller subsequently fell into financial difficulties and disappeared without completing the sale or returning Mr Kandola’s money.
Finding the right balance
Fortunately, cases like Mr Kandola’s are comparatively rare. An appropriately worded contract should ensure a fair balance between the respective interests of buyer and seller. For example, the standard conditions provide that the seller may use the buyer’s deposit towards his related purchase. However, this is on condition that his seller’s solicitor, in turn, will hold the money as stakeholder.
Choosing an experienced conveyancer, and listening to their advice, should ensure your home purchase runs smoothly.
If you have any questions about the conveyancing process, or are buying or selling a house, contact Kerry Dundas, director of conveyancing in our residential property team, on 01782 577000 or email firstname.lastname@example.org.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.