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Insights // 27 January 2017

Buying a Property: The Deposit Explained

Associate solicitor Manisha Bhula, head of our Residential Property team, explains the differences between a buyer’s overall deposit and the deposit required on exchange of contracts.

When a buyer talks to the Estate Agent or their mortgage broker about how much deposit they have they are usually referring to the amount of money you have to put towards the purchase price over and above the mortgage advance.  However the deposit required on exchange of Contracts is a different matter.

The Standard Conditions of Sale which are incorporated into the majority of residential property transactions require that a deposit of 10% of the purchase price be paid on exchange of Contracts.  
It is, however, not unusual for the full 10% not to be available, for example if the buyer is using a deposit received on their sale towards their related purchase at a higher value or if the buyer is taking a mortgage of greater than 90% of the value of the property.  In these circumstances the Seller may agree to accept a lesser deposit.  However should the buyer fail to complete the purchase the Seller would be entitled to receive the difference between the deposit actually paid and 10% of the value of the property.

Under the Standard Conditions when the deposit is paid on exchange of Contracts it will be held by the Seller’s conveyancer as “Stakeholder”.  This means it will be held in the conveyancer’s clients account and will not be passed to the Seller until the transaction has completed. 

However, in some circumstances the Standard Conditions are varied in order that the deposit is held as “Agent” for the Seller.  If this is the case the deposit monies can be paid to the Seller after exchange of contracts and before completion.  This is common when buying a newly built property from the developer.  The deposit monies will be paid to the developer after exchange of Contracts.  The buyer is usually protected against loss of their deposit if the developer goes into liquidation by the New Build Guarantee Scheme being offered on the property (ie NHBC).  The buyer’s conveyancer must ensure that the deposit will be protected before allowing it to be held as Agent.

If a Seller is also buying a property he is able to use the deposit he receives on his sale transaction as the deposit on his related purchase transaction, as long as the property he is buying is going to be his main residence and the deposit will be held at the top of the chain as Stakeholder.  Again this can be varied if the property at the top of the chain is a new build and the developer insists on the deposit being held as Agent.  As long as the deposit is protected by a new build scheme at the top of the chain this should not cause any issues.

Although the Standard Conditions allow for 28 days between exchange of Contracts and completion it is very rare for this to be the case these days.  It is common that the time between exchange of contracts and completion is not enough for the Seller’s Solicitor to clear the deposit cheque through their clients account.  For this reason the deposit is often “held to order” by the buyer’s conveyancer.  It is then paid to the seller’s conveyancer on completion with the balance of the purchase price.  Alternatively, in a long chain the deposit cheque can be posted by the conveyancer at the bottom of the chain directly to the conveyancer at the top.

If the deposit is held to order, the buyer’s conveyancer would be required to release the monies to the seller’s conveyancer upon receipt of a demand requiring this.  If the buyer fails to complete the deposit monies would be handed over to the seller’s conveyancer.

For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800. 

This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.

Manisha Bhula

Manisha Bhula

Partner, Residential Property

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