The Issues of Paying a 10% Deposit by Instalments

One of the key components of buying or selling a property is the payment of the deposit. The deposit is important as it provides security to the vendor of a property in the event that the purchaser fails to complete the contract and acts as an indication of intention to commit to the contract on the purchaser’s part.

Commonly, a deposit of 10% of the purchase price is payable upon exchange of contracts, and sometimes only a 5% deposit is required, depending on the situation.

A growing trend in conveyancing is the rise of 10% deposits being paid in instalments. 

Blanco v Wan

Critical Facts

The plaintiff (Blanco), as the vendor, entered into a contract on 8 December 2018 to sell the property to the defendant (Wan) for a price of $2,055,000. The deposit was to be 10% of the purchase price, being $205,500, but the contract stipulated that the vendor would accept $80,000 of the deposit paid on exchange, with the remaining $125,500 being payable on or before settlement. The contract also stipulated that if the purchaser defaulted under the contract, the purchaser would forfeit the 10% deposit, and the remaining balance would be payable immediately to the vendor as a result of the default.

Critical Issue

Can the vendor recover the balance of the 10% deposit?

The Supreme Court’s Determination

The Supreme Court of New South Wales (“The Court”) noted that generally, a vendor is entitled to keep the 10% deposit when the contract is terminated due to a purchaser’s breach but clarified that this principle only applies in respect of payments that “truly have the character of a deposit”, and are paid as an earnest of performance of the contract.

The Court touched upon whether the payment of the balance of the 10% deposit could be characterized as a true deposit and concluded that as the remaining balance of the 10% deposit was immediately due and forfeited to the vendor due to the purchaser’s failure to complete the contract, it did not bear the character of a deposit, and as such, the principles concerning penalties and forfeitures applied.

The Court found that as the remaining $125,500 of the 10% deposit was immediately payable to the vendor upon the purchaser’s failure to complete the contract, it would not be paid as an earnest of performance of the contract and therefore did not have the character of a true deposit. As a result, the vendor was able to keep the $80,000 that had already been paid but could not recover the remaining balance.

Summary

This case highlights the inherent issues with paying deposits by instalments, particularly the phrasing and scope of the special conditions which facilitate them. The effect is that if they are found to be a penalty rather than a payment demonstrating an earnest performance of the contract, then it is unlikely that the vendor will be able to recover the remaining balance.

For further information, refer to https://www.caselaw.nsw.gov.au/decision/17862a0a053503d9c6419bd1

Article by Cooper Smith