There is no requirement in law for either party to pay a preliminary deposit to the other party since there is no legal contractual obligation to go ahead with a sale or a purchase until exchange of contracts has taken place. However, you will find that in some cases a preliminary deposit is requested to be paid to show commitment to the transaction and in most cases it is requested from the buyer.
A preliminary deposit is different to the deposit paid on exchange of contracts. The deposit paid on exchange of contracts means you are entering into a legally binding contract with the Seller and if you subsequently withdraw from the sale you will forfeit your deposit. The deposit paid on exchange should not be confused with 'preliminary deposits' which this article focuses on.
A preliminary deposit paid to an Estate Agent
Sometimes, the Seller will require payment of a preliminary deposit to be paid to the estate agent to show that the Buyer is genuinely committed to buying the property.
If the Buyer does make such a payment he should ensure the Seller has given written authority to the estate agent for them to accept payment on the Seller's behalf since if this not the case, the Buyer will have no recourse against the Seller in the event the estate agent mishandles the deposit. A written receipt should always be obtained from the agent.
Deposits of a few hundred pounds are normally requested. Note that interest on a preliminary deposit which exceeds £500 may be payable by the estate agent.
If a preliminary deposit is paid then the Buyer should inform their conveyancer so the deposit can be deducted from the purchase price once the matter proceeds to completion. Deposits are usually refunded if the transaction does not proceed.
Note that it is increasingly common for a lockout agreement to be entered into. Click here for further information on lockout agreements.
New Build Properties
A Seller who is a developer or builder will almost always require a preliminary deposit to be paid by the Buyer. This deposit, in some cases, may act as an option to buy a numbered plot at a stated price with the Seller agreeing not to sell the plot to another Buyer and to keep the price as it is, provided contacts are exchanged within a specified period. Often you will find that if the Buyer changes his mind and does not wish to proceed then the deposit is non-refundable. Sellers will make this very clear from the outset. That said, the Buyer should make sure he is clear about the position and so too should his conveyancer.
A copy of the receipt for payment should be retained. The preliminary deposit should then be deduced from the purchase price once the matter proceeds to completion.
Conveyancers should always make enquiries of their clients to ascertain whether they have entered into any agreements or signed any authorities that may be relevant to the transaction.