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Deposit

This simple word has three common meanings in connection with house purchase although its original purpose is going out of use.

The first general reference to a ‘deposit’ can often mean no more than the personal contribution towards the price of the property – in other words, it is the difference between the purchase price and the amount of mortgage being borrowed. This is the amount of capital or equity being put into the transaction in the form of cash which may, of course, come from the sale of your existing home.

The second refers to a small holding deposit which is sometimes paid initially once an agreement is reached, ‘subject to contract’. This has no legal significance but is merely paid as a sign of good faith. It may be called a pre-contract deposit.

Although in most parts of the country this practice is dying out, it had some merit since it served to give the seller confidence that the prospective buyer was serious in his intention to buy the property.  Both parties could draw reassurance from this sign of good faith, even though there was no binding commitment on either side.

Traditionally it would have been 1% of the agreed price but for convenience this pre-contract or holding deposit should not exceed £500 as at that level various regulations come into play.

In any case you should never pay a deposit unless you are confident the estate agency is ‘bonded’ and even then you should make sure you get a full receipt setting out all the information specified by the Estate Agents (Accounts) Regulations 1981. If in doubt talk to your solicitor first.

As remarked, among estate agents this practice has largely died out. It was not binding and had no practical effect yet some prospective buyer thought it meant the seller could not consider other offers. This misunderstanding could cause aggravation and the book-keeping made it an extra and unnecessary exercise. Unless agreed otherwise before the money is paid over, it is fully refundable.

In contrast, when it comes to the purchase of a new property under construction, reservations are only accepted when a holding deposit is paid. Most new property developers publish a clear explanation of their terms of business which will specify the amount of the deposit and whether it is fully or partially refundable. It should also explain exactly what time scale applies. A deposit may be good for 28 days, after which time the seller may reserve the right to re-offer the plot or reconsider the price. You must ask the sales representative about this and make sure you know the full terms and conditions that apply.

Technically there is a further aspect relating to a deposit in these circumstances. The question is who has control of the money in question.

If it is paid over to a ‘stakeholder’ that means it remains your money throughout which means you may ask for it back at any time. It is always under your control until exchange of contracts. Deposit money should always be kept in a separate account and not made available for the sellers (or the development company) to use. The accounts involved will be designated as Trust Funds and therefore should be adequately safeguarded.

The alternative is that the pre-contract deposit may be paid over to the salesperson as an ‘agent for the seller’. It may still be refundable on the agreed basis within the specified time scale but the seller is allowed to use the money as working capital in the interim. If the prospective buyer wants the money back, it must still be paid but it is not then under the control of the salesperson who will have passed the money on to the company or the seller-clients. This means any refund may take a little longer to organise.

The third definition relates to the contract drawn up for the sale which normally requires payment of a ‘deposit’ at the time contracts are exchanged. This contract deposit will usually be 10% of the purchase price, but a lower figure could be agreed in certain circumstances – for – example if the purchaser is obtaining a 95% or 100% mortgage.

You should also discuss the exact legal status of your deposit with your solicitor or legal adviser in relation to the purchase of an existing house when it is part of a chain of transactions. In many cases the deposit may be taken by the seller’s lawyer acting as an ‘agent for the seller-client’. That would allow the seller to use this money as part of his own deposit for the property he is buying.

This procedure is commonplace but does carry a small risk that – in – the highly unlikely event of a problem – the – money, which has been used in relation to several inter-related transactions up the chain, may be insufficient to cover all the associated abortive costs. In due course, the person responsible for the default will still have to cover the resulting extra expenses.

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