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The payment of a deposit by the buyer on exchange of contracts is intended to act as part payment towards the purchase. It is also to show an ‘intention’ to buy the property and to give the seller protection if the buyer withdraws from the Conveyancing transaction; if this were to happen, the buyer would forfeit their deposit.
The standard conditions of sale provide for a 10% deposit to be paid on exchange of contracts, based on the purchase price and the value of the chattels (other items that have been agreed to be sold under the contract).
It is good practice for the buyer’s Conveyancing Solicitor to take full instructions from their client as to how they will be funding the deposit.
A family member may be helping them with funds in which case the lender will need to be notified. If the buyer is using their own savings then evidence in the form of a bank or building society statement should be supplied.
Money laundering regulations are very onerous on Solicitors so great care must be taken to ensure they have carried out proper investigations into the source of funds before they proceed with a matter.
The buyer may need to rely on bridging finance to fund the deposit in which case this should be advised to the conveyancer from the outset so everything is in place in time for exchange. The conveyancer should advise their client on the risks with bridging finance, eg, high interest rates and what happens if the sale aborts. A conveyancing solicitor may also need to give an undertaking to the bridging finance company to pay the loan out of the sale proceeds (if they are selling and buying also) or the mortgage proceeds.
If the deposit is held as ‘agent’ for the seller, it means that it can be paid to the seller before completion without the consent of the buyer and it can be used towards the seller’s related purchase. There is a risk with this since if the seller uses it on a related purchase the buyer will have difficulty getting it back if the seller does not go ahead with his sale to the buyer.
The standard conditions of sale, condition 2.2.6 generally provides for the deposit is to be held as stakeholder. It means that the deposit can be handed to either party provided the circumstances justify it. This condition can, however, be varied by the parties.
Whether the solicitor is holding the deposit as stakeholder or agent, interest may accrue and it is up to the parties to decide to whom this interest should be paid. The standard conditions of sale 2.2.6 states that if it is held as stakeholder it is to go to the seller.
For more information about deposits and the exchange of contracts when buying a freehold property, refer to Buying a Freehold House Part III - Conveyancing for the Exchange of Contracts, written by our legal guru Tony.