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The Pitfalls of Release of Deposit Clauses

The usual procedure on the exchange of Contracts for a property, the Purchaser gives to the Vendor’s agent the cheque for the deposit. The deposit is a sign of good faith by the Purchaser to the Vendor, that they are serious about purchasing the property. The amount can vary, but is usually 10% of the purchase price. This is usually held on trust by the Vendor’s estate agent, or in some cases by the Vendor’s solicitor. On settlement, an Order on the Agent is sent from the Purchaser’s Solicitor to the estate agent (via the Vendor’s solicitor) to allow them to release the deposit. The estate agents will deduct their commission from the deposit and the balance will be sent as directed by the Purchaser.
A release of deposit clause is sometimes requested before the contracts exchange (during the initial negotiation period, before contracts are signed). This clause allows for the Vendor to have access to the deposit funds before settlement. This is usually requested because the Vendor wants access to the funds to use in their own property purchase. The funds can be used to either pay for stamp duty or to pay for the deposit on a property the Vendor is purchasing. The funds may also be requested if the Vendor needs money quickly, due to debts. On some occasions, the estate agent will ask the Vendor to request it, so they are able to get their commission quickly.
The release of deposit clauses are heavily cautioned by the Law Society. This is noticeable in the Contract for Sale of Land 2014 edition, which has a warning against the release of deposit funds. The reason why the release of deposit clause is discouraged is because it can become difficult to recover if the Contract falls over because of the actions of the Vendor. The recovery can have significant legal costs involved. Some of the situations which can occur where it may be difficult to recover the deposit are if the Vendor dies, or they go bankrupt, or an order affecting the Vendor due to a Family Court order. It is important to seek the advice of a solicitor about these issues if you are going to purchase a property.