What You Need to Know About Deposits When Buying or Selling Property

How much should my deposit be?

When buying or selling a property, the deposit amount will be written on the front page of the agreement and will state where it is to be paid – usually to the real estate agent’s trust account once the agreement becomes unconditional. The deposit amount is often 10% of the purchase price which is generally sufficient to cover the agent’s commission entitlement. The seller only pays commission if the agent achieves an unconditional sale contract. It doesn’t matter how much work an agent does to get that sale – commission is paid based on results. Therefore, if a buyer confirms a contract as unconditional but then defaults on settlement, the seller will still need to pay the agent’s commission.

Under the current ADLS agreement for sale and purchase, if a seller elects to cancel an agreement due to the buyer defaulting on settlement, the seller can only retain a maximum of 10% of the purchase price (and look to seek additional damages). If you are selling, and the deposit amount on the front page is more than 10%, you should talk to your lawyer about varying the standard buyer default conditions in the agreement to allow you to keep a higher deposit amount.

Should I agree to release my deposit early?

We are starting to see more contracts come in with an early release of deposit clause included in the further terms. Consideration needs to be given before inserting this condition into an agreement or agreeing to an early release. Until a deposit has been held by a real estate agent for 10 working days, the funds still technically belong to the buyer. Often a seller will request an early release of the deposit (usually to assist with payment of the deposit on their next purchase), however, a buyer is under no obligation to agree to the early release.

In general, lawyers are only able to pay the balance of a deposit out to a seller if there is no mortgage over the property being sold. If there is a mortgage registered over the title, we are often required by the banks to hold the deposit in our trust account until settlement so the funds can be used to repay the mortgage (if required). If you do need the deposit funds from your sale, please discuss this with your lawyer at an early stage. We can then look to negotiate an early release of the deposit with the buyer’s lawyer and confirm that your bank also approves the release.

Before agreeing to an early release, buyers should keep in mind that if the transaction does not settle and the seller has already received and spent your deposit, you do not have any security over the funds, and it may be difficult to get them back from the seller.

What if the purchaser needs to withdraw their KiwiSaver to pay the deposit?

If a purchaser is intending to withdraw their KiwiSaver and use these funds towards payment of a deposit, the agreement needs to be amended and a clause inserted confirming that KiwiSaver funds are being used for the deposit. The deposit funds must then be paid to the vendor’s lawyer’s trust account and held until settlement. Any early release of these funds will not be able to occur. The agent should also ensure that there is sufficient time between signing the agreement, confirmation, and settlement to allow for the Kiwisaver funds to be withdrawn.

What happens to the deposit if I am purchasing a ‘house and land’ package?

In this case, the deposit should not be paid to the real estate agent but to the seller’s lawyer’s trust account to be held as ‘stakeholder’ until settlement has occurred (usually once the title and code compliance certificate have issued). Every ‘house and land’ package contract is different so you should check the deposit provisions very carefully and discuss these with your lawyer.

Seeking legal advice

In most cases, the deposit is a substantial amount of money which neither seller nor buyer wants to lose once they become entitled to it. We suggest that you discuss your particular situation with the property team here at Cavell Leitch to ensure that your deposit funds are protected.