Deposits – How much do I have to pay and when?

A contract for the sale of a property and/or land will normally contain a provision whereby the buyer is required to pay a deposit to the seller at the point contracts are exchanged.

An exchange of contracts is when the sale becomes binding on both buyer and seller and the deposit, typically 10% of the purchase price, acts as security between exchange of contracts and the completion of the sale.

Residential sales contracts currently incorporate the Standard Conditions of Sale (Fifth Edition), while contracts for commercial sales incorporate the Standard Commercial Property Conditions (Third Edition). Both sets of standard conditions provide for the basis on which the deposit shall be payable on exchange of contracts, unless it has been otherwise agreed in writing between the parties.

It is often common for clients to think of their “deposit” when buying a property as the difference between their mortgage advance (i.e. what they are able to borrow from a lender) and the purchase price of the property.

For example, you may be purchasing a house for £450,000.00 and have saved £80,000.00 as a “deposit”. The bank has agreed to grant you a mortgage of £370,000.00 to make up the balance. However, the deposit actually required on an exchange of contracts will usually be £45,000.00, being 10% of the purchase price. Do also have in mind that not only will you need the balance of the purchase price but also the Stamp Duty Land Tax and all costs and disbursements.

So, when do you pay the rest? Once contracts have been exchanged, your solicitor will start preparing your conveyancing file for completion. Part of this involves sending out to you what is known as a “completion statement”. The statement will detail all monies in and out on your transaction. It will also detail the amount required from you to complete your purchase, to include the amount to pay any Stamp Duty Land Tax and the balance of any legal fees and disbursements due.

So what happens after you have paid your deposit? Well, this somewhat depends on the terms of your contract. Deposits paid on exchange of contracts are normally held by the seller’s solicitor as “stakeholder”. This means that the stakeholder will hold the deposit on behalf of both the seller and the buyer and cannot pass it to either party without the consent of the other (at least until completion has taken place or the contract so provides). In some circumstances, a deposit may be held by a solicitor as “agent” for the seller. This means the solicitor acting for the seller can release the money to the seller at any time.

The disadvantage to having your deposit held as agent is that the deposit may be lost in an event where the seller is declared bankrupt or fails to complete the transaction. It is therefore crucial that the terms of the contract are thoroughly checked prior to exchange; further, if a contract does specify that the deposit shall be held as agent, the necessary enquiries will generally need to be raised to ascertain the reasons for why this is required.

Often, a deposit will be required to be held as agent where the property is a new build property, in the course of being constructed by a developer. This is because the developer may require the deposit to partially fund another project, to repay a loan such as development finance or because in-house solicitors are acting and therefore there is no ability to hold monies in a client account. In this instance, the buyer is usually protected against loss of their deposit by a new build warranty or guarantee scheme being offered on the property (available through a number of construction warranty and insurance providers, an example of such is NHBC). Your solicitor should enquire with the seller’s solicitor before exchange of contracts whether a deposit protection scheme is in place and you should be provided with a copy of the new build warranty and policy of insurance.

If you are thinking of buying or selling a property, please do not hesitate to contact our experienced Property Team to arrange for an all-inclusive quote.

01702 662963 (Essex)  020 35537115 (London).