Deposits (On Purchase of Land Contracts)

5 %  or  10%  –  What is the Catch?

There are important considerations that a buyer (purchaser) and a seller (vendor) must make when entertaining the amount of the deposit on the sale of land contract.

The sale of land contract (copyright) as issued by the Law Society NSW provides for a 10% deposit to be paid by a purchaser to a vendor on exchange of contracts.

A reduced deposit of say 5% may be agreed by the parties. A reduced deposit is sometimes requested by a purchaser where the 5% amount is already significant in quantum or the full 10% is difficult to raise as a cash up front item.

The terms of the reduced deposit are critical to the enforceability of the remaining 5% deposit by the vendor against the purchaser in the event the sale does not complete.

In order for the vendor to be able to enforce the collection of the remaining 5% deposit the terms of the staged approach of the payment of the deposit must be such that the deposit is at all times a genuine deposit and it does not lose its character or nature given the instalment approach.

The deposit is representative of the “earnest for performance” and evidence of the sincerity of the purchaser, per Howe v Smith [1881-85] All ER Rep 201 and Brien v Dwyer [1978] HCA 50; (1978) 141 CLR 378 at 385.

A genuine deposit may keep its nature even if payable by instalment, however, a vendor needs to be very careful how the remainder instalment payments are expressed. If remainder payments (say the remaining 5%) is not payable unless completion is reached or a breached by the purchaser causes the contract to terminate then the remainder may be deemed a “penalty” and may not be lawfully enforceable by the vendor, per Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 and Dunlop v Pneumatic Tyre Co Pty Ltd and New Garage & Moto Co Ltd [1915] AC 79. Penalty clauses go against modern general philosophy (jurisprudence) and public sentimentality to protect consumers and possibly, more broadly speaking, weaker parties (though of course this is arguable).

If properly expressed instalment payments are valid, if they maintain their character at all times, are not unconscionable or excessive then instalments may indeed be enforceable, per Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40, Rana v Dalla Costa [2014] NSWSC 1113 and Sydney Developments Pty Ltd v Perry Properties Pty Ltd [2016] NSWSC 515.

Deposits need some careful consideration by both parties to a contract.

CategoryProperty Law