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Do I have to pay a deposit when I exchange contracts?
While there is no absolute legal requirement for a deposit to be paid, it demonstrates that as the buyer you are committed to the contract. And it would be very unusual for a seller to agree to exchange contracts without one.
How much deposit do I need?
Traditionally, on exchange of contracts, purchasers pay 10% of the agreed purchase price as a deposit. But if you are borrowing more than 90% of the purchase price, in most cases the seller will accept a smaller deposit. If you are selling and buying, it is usual for the buyer’s deposit at the bottom of the conveyancing chain to be acceptable to all of the sellers in the chain. However, you may be asked to make up the difference between that amount and 10% of your purchase price.
A deposit should not be more than 10%. If it is, the courts have held that this amounts to a penalty on the buyer, which means that the seller cannot legally enforce it.
Can the seller run off with my conveyancing deposit following exchange?
Put simply, no. The seller’s solicitor should hold your deposit as ‘stakeholder’ until completion. But where the seller has a connected purchase, creating a chain, the seller may use all or part of your deposit towards the deposit on their connected purchase. This is in accordance with the Standard Conditions of Sale (5th edition), which are incorporated into most conveyancing contracts in England and Wales.
Buyers should resist a contract that provides that the deposit is held by the seller’s solicitor as ‘agent’ for the seller, as opposed to ‘stakeholder’. As an agent, the seller’s solicitor may hand the deposit over to the seller before completion to enable the seller to use that money towards the deposit on their own purchase. This is likely to make it both difficult and costly for the buyer to recover the deposit if the seller fails to complete on the sale.
Can I protect my deposit after it is paid?
To an extent, yes. Following exchange of contracts, your conveyancing solicitor can register a notice at the Land Registry to protect your interests under the contract. To third parties, this acts as a warning that the seller is legally committed to selling the property to you.
Can the seller keep my deposit if I do not complete?
Yes, the seller is entitled to keep your deposit, as well as any interest that has accrued on it since exchange of contracts. The seller may also sue you for breach of contract in order to recover any losses they have incurred as a result of your default. That is why COVID-19 clauses in conveyancing contracts have become so important in recent months.
Does the seller have to repay my deposit if they fail to complete?
Yes, a seller who fails to complete must repay your deposit with accrued interest. You may also decide to sue the seller to recover any losses you have incurred as a result of their default. If certain conditions are satisfied, you can also ask the court to grant you an order for specific performance, forcing the seller to complete the sale on the contract terms.
In a recent article, we considered how the economic uncertainty resulting from the pandemic has led to many mortgage lenders withdrawing their high loan-to-value products. In many cases, buyers have found that lenders are only prepared to offer them a mortgage if they have a deposit of at least 20%.