Developers’ rights to recover unpaid split-deposits are on shaky ground following a series of judgements by the NSW Supreme Court.
With the property boom in Sydney, it’s become increasingly common for purchasers to request a split-deposit option on potential property transactions, with 5% payable on exchange and the remaining 5% on completion.
Developers assume they are entitled to recover the full 10% deposit if the purchaser defaults on the transaction. But a series of rulings by the NSW Supreme Court means this may no longer be the case.
A shift from guarantee to penalty
In legal terms the 10% deposit is a payment to prove “earnest of performance”. In other words, it’s an upfront guarantee given by the purchaser to the vendor to say, “I really mean business.” In practice, however, the “upfront” nature of this guarantee is where the trouble lies.
The Supreme Court has ruled (in a number of cases) that when the payment of a final deposit instalment falls on the day of completion, this payment falls short of being a true deposit. Instead, it’s effectively functioning as a penalty payment. The Court has then gone on to rule that, as a penalty payment, the final deposit instalment isn’t enforceable as it doesn’t reflect a genuine pre-estimate of potential damages to the vendor from the purchaser’s default.
How to manage the risk of split-deposits in the shifting legal landscape
Supreme Court rulings like this mean it’s becoming increasingly tricky to recover deposit instalments where payment is due on completion or linked to a breach of contract. There are ways, however, to reduce your risks when a purchaser defaults.
TDF’s Pierre Saab, Director and Principle at Macquarie Lawyers, recommends that you:
- Insist on full payment of the 10% deposit upfront, either as a cash deposit, or in the form of a deposit bond.
- When full upfront payment is not possible, ensure your solicitor drafts the split-deposit “special conditions” with instalments described as amounts in “earnest of performance” so they are properly categorised as true deposits.
- Insist on a precisely drafted “special condition” to ensure the balance of a split-deposit is paid before the completion date.