Early release of deposit; can it be done & what are the risks
Tuesday, September 04, 2018
While the vendor in a sale of land contract cannot typically access the deposit until settlement, it is becoming increasingly common for parties to insert a special condition which allows for the early release of the deposit.
Such a condition allows the vendor to access the deposit funds prior to settlement and is typically used in one of two circumstances:
- where the vendor is a property developer and wants to use the funds to help fund the development; and
- where the estate agent seeks early payment of their commission.
Another, but far less common, reason for a deposit’s early release is where the vendor requires the funds in order to finance a deposit toward a property they are purchasing simultaneously.
While the early release of the deposit is permitted, there are a number of potential risks involved in doing so. Firstly, from the agent’s perspective, the release of the deposit must comply with the Agents Financial Administration Act. The early release must also be agreed upon by both the vendor and purchaser. It should be provided for in a special condition in the contract of sale. If these requirements are not complied with then the deposit’s release may not be permissible and the agent may face pecuniary penalties.
Purchasers must also be aware of the potential risks of agreeing to release their money to the seller. The early release has the potential consequence of the contract becoming an instalment contract. This would mean that the deposit becomes an ‘instalment’, and would not therefore be refundable to the purchaser in the event of the contract being terminated. To prevent this situation from occurring, the special condition allowing for the deposit’s release should state unequivocally that the payment remains a deposit, and is refundable to the purchaser as per the usual contractual terms.
Another potential risk for the purchaser is that the early release means the funds are no longer protected in the agent’s trust account. In the event the vendor subsequently goes bankrupt, it is highly unlikely the purchaser will be able to recover their deposit.
While the early release of deposits is becoming increasingly common in sales of land, it brings with it risks to most of the parties involved. With careful drafting of the special conditions these risks can largely be mitigated.
NB: Different rules apply in relation to self-managed super funds releasing a deposit early.
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