When buying a house or property you normally need to pay a deposit. This is the amount paid to provide a form of security to the vendor that you will complete the transaction at settlement. Since deposits are usually between 5% and 10% of the total purchase price, it will be a significant amount.
Common questions we hear regarding the deposit - When do I pay the deposit? Where is the deposit paid to? What happens to it? Is it safe?
When do I pay the deposit?
Under the standard terms of the Auckland District Law Society / Real Estate Institute of NZ agreement for sale and purchase of real estate the deposit is due to be paid immediately upon signing of the agreement by both parties unless another time is specified. Generally the real estate agent will provide details of where the deposit is to be paid and you would have a day or so to arrange the bank transfer.
It is now common to see agreements where the deposit is to be paid upon the agreement being declared unconditional. That means that the deposit isn’t due when the agreement is signed but only once the purchaser (and vendor, if they have any) has confirmed their conditions as satisfied (e.g. finance, LIM report, building report). From an administrative point of view this makes sense as agent won’t need to arrange a refund of the deposit if the agreement doesn’t go ahead for non-satisfaction of a condition.
If you have purchased a property at auction you will be required to pay the deposit immediately upon winning the auction as the agreement will be unconditional.
Where is the deposit paid to?
The deposit will usually be paid to a trust account administered by the real estate agency. A trust account is a separate bank account that is subject to a high standard of regulation. The agency is required to hold the funds on behalf of the person or people entitled to it. Prior to paying the deposit out of the trust account the agency is required to confirm that they are paying to the person entitled to it.
What happens to the deposit?
The deposit for the purchase of the property is required to be held in the agency’s trust account until all conditions under the sale and purchase agreement have been satisfied. The agent is also required to hold the deposit in their trust account for at least 10 days unless both the purchaser and vendor agree for it to be released prior to those 10 days. If the agreement is confirmed as unconditional the deposit will be paid to the vendor, less any commission or other fees being deducted by the agent.
If the conditions under the sale and purchase agreement are not satisfied then the deposit will be immediately repaid to the purchaser.
What if the settlement date is months away?
If there is a significant amount of time between when the agreement becomes unconditional and the settlement date we advise clients to register a caveat over the property to help protect both their deposit and their interest under the sale and purchase agreement. The caveat gives notice that a purchaser has an interest in the property and would stop the vendor from doing anything with the title to the property without the purchaser knowing.
What about when I am buying a property ‘off the plans’?
Sale and purchase agreements for properties that are ‘off the plans’ or yet to be subdivided or built are often bespoke agreements and they require careful review to make sure that the purchaser’s deposit is protected. The deposit will usually be paid months or years prior to the settlement date and you need to ensure that it is protected by ensuring that the agreement specifies that it will be held in a trust account until settlement and not released to the developer early.
Due to the long timeframe between entering into the sale and purchase agreement and settlement there is a risk that the developer could get into trouble financially and not complete the development. If that happens and the deposit has already been released to the developer it will be unlikely that the purchaser will ever see the deposit again. A purchaser needs to ensure that the deposit is protected and it won’t be lost to the developer.
Prior to signing an agreement to purchase a property ‘off the plans’ ensure that it is reviewed by your lawyer to confirm that your deposit is protected.
So my deposit is safe?
Generally speaking under the standard form Auckland District Law Society / Real Estate Institute of NZ agreement for sale and purchase of real estate your deposit will be safe provided you pay it to either the agent’s or your conveyancing lawyer’s trust account. You should confirm with your conveyancing lawyer or agent the total amount of the deposit and if it will be due on signing or on the agreement becoming unconditional.
If you are entering into an ‘off the plans’ agreement you should ensure that your conveyancing lawyer reviews the entire agreement prior to signing to ensure that your deposit is protected.
Do not hesitate to contact us for a review of your sale and purchase agreement prior to signing. We can ensure that your deposit will be protected and that it is paid to the correct trust account.
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