March 30, 2011 Leave a comment
Deposit release is one of the most misunderstood aspects of the conveyancing process. Like most attempts to explain any particular topic, it is best to return to basics to understand what it is that is trying to be achieved.
The common law has a rule against penalties. This rule prohibits the imposition on a contracting party of a penalty for contractual breach. Thus forfeiture of a deposit for breach of contract by the purchaser would normally be liable to be struck down by this rule against penalties. However, the common law was prepared to accept that a 10% deposit was a show of good faith by a purchaser (an ‘earnest’) and a reasonable pre-estimate of the vendor’s likely losses for non-performance by the purchaser. Accordingly, forfeiture of a 10% deposit for breach of contract is an exception to the rule against penalties, although forfeiture of a greater deposit might offend the rule. In these circumstances the common law regarded the deposit as being the vendor’s property immediately upon payment. Statutory protection against forfeiture of the deposit and contractual notice requirements merely ameliorated the vendor’s fundamental right to have the deposit immediately upon payment.
This (typically) pro-vendor approach of the common law did not sit well with the raging consumer protectionism of the 1980s, which saw a raft of purchaser protection mechanisms introduced in the Sale of Land Act. Indeed, there had been (limited) examples of purchasers suffering as a result of this pro-vendor approach. Changing financial circumstances (and a few rogue vendors) had resulted in purchasers being faced with an obligation to pay a balance of 90% under the contract, but an absent vendor who had decamped with the 10% deposit and a secured mortgagee requiring payment of more than 90% (indeed, in some cases, more than 100%). The purchaser was caught between a rock and a hard place, with the choice of either walking away from the contract and abandoning the 10%, or finding more than 90% to complete.
The potential for vendor failure is most prevalent in an ‘off the plan’ environment. In such circumstances the purchaser’s 10% deposit was indeed exposed to dissipation in the hands of a vendor who had contracted to sell something that did not even exist at the date of the contract and so s.9AA Sale of Land Act requires that such deposits be held on trust for the purchaser until registration of the plan.
For all other transactions a deposit-release procedure was introduced. This requires the deposit to be held ‘in stakeholding’ (a legal concept akin to ‘in limbo’) until certain conditions are satisfied. Essentially this process is designed to allow the purchaser to be satisfied that the vendor will be in a position to complete the contract by acceptance of the 90% balance. Regrettably, due to some poor legislative drafting, the process is much more complicated than it needs to be and often leads to considerable inefficiency.
A vendor may seek release of the deposit from stakeholding prior to settlement by satisfying the requirements of s.27. This requires the vendor to give the purchaser ‘a notice in writing’ setting out particulars of any mortgage or caveat affecting the land and envisages the purchaser then giving the vendor an ‘authorization in writing’ to release the deposit from stakeholding. The section anticipates the possibility that the purchaser will not bother responding to the vendor’s request for release of the deposit by providing that ‘authorization’ will be deemed to have been given if the purchaser fails to respond within 28 days of delivery of the particulars.
Thus explained, the process sounds simple. Indeed, where there is no mortgage or caveat relating to the land, the vendor is not obliged to do anything other than to wait 28 days from contract before releasing the deposit, as the section only requires a ‘notice in writing’ if there is a mortgage or caveat. Arranging transfer of the deposit from an agent to the vendor’s solicitor pursuant to s.24(c) during this time will allow for speedy release upon the expiration of the 28 days.
Where the property is subject to a mortgage; the particulars must be in the form of Schedule 1. This form was designed to provide particulars to purchasers who were buying in the relatively rare situation where the purchaser was taking over the vendor’s mortgages and the decision to use this form is the first example of poor drafting. The information that a purchaser who is assuming continuing responsibility for a mortgage after settlement would want is far more extensive than a purchaser who knows that the mortgage will be discharged at settlement. Some purchasers insist on a letter from the lender, although there is no legislative requirement for that, and others take the view that no matter how much information is provided, they will never be satisfied. The 2008 contract seeks to provide guidance as to what may be acceptable by nominating a mortgage debt of not more than 80% of the contract price as a reasonable figure below which the purchaser should consent to deposit release, but this guidance cannot overcome the provisions of the Act.
The second example of poor legislative drafting is the proviso that ‘the contract is not subject to any condition enuring for the benefit of the purchaser’. This was meant to prohibit release if a condition such as a finance condition, or building inspection condition, or sale of the purchaser’s own property condition had not been satisfied and when viewed in that context, is entirely acceptable. However it refers to ‘any’ condition and all contracts are subject to many conditions, some of which (for instance the obligation to deliver the property at settlement in the condition it was when sold) enure for the benefit of the purchaser until settlement. Interpreted this way, the deposit could never be released until settlement.
Purchasers who seek to rely on this provision to avoid release of the deposit are not acting within the spirit of the legislation, but the effort involved to seek release in such circumstances usually far outweighs the small benefit to the vendor that release achieves. The process should be overhauled.
By Russell Cocks