As conveyancers, one of the most common causes of panic among clients is when a 5% deposit has been agreed but they have been presented with a contract for sale to sign which has a 10% deposit on the front page.
Is it a mistake? Have the vendors re-negged on their agreement? Not necessarily. The vendor solicitor is 'pretending' the deposit is more than it is.
Why would the vendor solicitor want to pretend that the deposit was 10% when it was really 5%?
When it comes to enforcing contracts, seizing a deposit is the ‘low hanging fruit’. If a buyer defaults then the vendor is able to claim damages. The easiest route is to forfeit the deposit held by the agent.
There’s no need to prove that the vendor has suffered any losses. There’s no need to put the property back on the market to establish that the vendor has truly been affected by the buyer’s default.
They can simply take the deposit. It’s a fairly sacred principle of mercantile transactions; if you fail to complete, you lose the deposit.
And while there is a little bit of paper work still required by a vendor’s solicitor to seize the deposit, it is nothing compared to the work involved if the vendor could only sue the buyer for damages under contract.
That route could possibly take years of Supreme Court litigation as the vendor would need to establish precisely what losses they have incurred by the buyer’s breach.
So for that reason, a custom has evolved whereby the vendor’s solicitor almost attempts to ‘pretend’ that the deposit for the purposes the possible enforcement of contract only is 10%.
What this normally involves is typing a 10% deposit on the front page but including a special condition which says that the vendor will actually accept 5% on exchange and 5% on the completion date.
The idea is that if the buyer defaults, rather than having to put on a complex and costly claim for breach of contract, the vendor’s solicitor could potentially claim the further 5% owed as a simple debt (sometimes known as ‘liquidated debts’).
This seems a bit contrived. Is it actually legal?
The short answer is ‘potentially’ depending on how the vendor’s solicitor has drafted the contract. But it is not necessarily certain. There have been a number of Supreme Court cases (e.g. Lanello v Sharpe (2007) that have held that ‘deposit top-up’ clauses are actually invalid since they constitute unenforceable penalties. Whereas there have been some other cases that have said, if drafted correctly, there is nothing to prevent two parties agreed to a further 5% having to be automatically paid upon default.
But bear in mind, what might be legally effective may not be practically effective...
People have to bear in mind that if we are in a scenario where the vendor is claiming a further 5% 'top-up' under the contract, the buyer by definition defaulted and is unable to find funds to complete. Whether you have an easier legal claim against them as a vendor may be academic if the purchaser is broke!