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What do you think ‘DEPOSIT’ actually means?

Deposit

If I had to pick one area in conveyancing where people have wasted hours talking at cross-purposes then it would be about the word ‘Deposit’. When a buyer walks into a solicitors office they are absolutely clear what the word means. The solicitor in turn is also absolutely clear what the word means. The only problem is that they are each thinking different things. This guide is meant to de-mystify the word Deposit and hopefully avoid misunderstanding.

So there are 2 ways of looking at a Deposit – the ‘Normal’ way and the ‘Legal’ way. Here’s how they differ:-

The ‘Normal’ meaning of a conveyancing Deposit
If you’re purchasing a property and you are a human being (as opposed to a solicitor), then when you say the word ‘deposit’ in relation to purchasing a house you usually mean the amount of money you yourself are putting down (as opposed to the amount that you are borrowing on a mortgage). So if you’re borrowing 60% of the purchase price on a mortgage then you in turn are going to put down a deposit of 40%. That’s what most people mean when they first walk into an estate agents or solicitors office and people start having a conversation about deposits

The ‘Legal’ meaning of a conveyancing Deposit
OK here’s the science bit. As solicitors are involved you can trust us to do things a bit differently. In the conveyancing process there is a clear and definite meaning to the word deposit. To explain this you have to firstly know a bit about the house purchasing, or conveyancing, process. Conveyancing takes place in two main parts – before contracts have been exchanged, and after contracts have been exchanged.

Before contracts have been exchanged:-
up until the nanosecond that contracts are exchanged, either party can pull out of the transaction, with no comeback. You can have been in negotiations for months and months, and be all ready to exchange contracts. You might even have agreed you’re going to move in the following week. Even thought everything is gearing up to it all moving ahead, at this stage, if the other party change their mind then there’s nothing you can do about it.

After contracts have been exchanged:-
Everything changes with exchange of contracts. From that moment on you are bound to buy the property, and the seller is bound to sell the property, at the price that is set out in the contract. This all has to happen on the date entered in the contract for completion (the completion date). Once contracts have been exchanged then if one party pulls out the other party can sue them for damages.

I told you the science bit was coming didn’t I, well here it is. When you exchange contract you have to hand over some money as an indication that you are serious about purchasing it. The money that you hand over is what solicitors call the deposit. Usually this is meant to be 10% of the purchase price. Over the last 25 years however it became normal for sellers to allow the buyers to pay over a reduced deposit (usually because the buyer was having a 95% or 100% mortgage – so they just didn’t have 10% lying around). Even if the seller agrees to accept a reduced deposit, if the buyer then pulls out of the transaction they are liable to lose the full 10%. So if they’ve only paid over 5% then they pull out the seller can keep that 5% and sue the buyer for the other 5%.

So imagine you’re purchasing a property for £100,000, and you’re having a £70,000 mortgage to help you. Your understanding of the deposit would be that it’s £30,000 – that’s the amount you’re putting down on the property. The solicitors understanding of the deposit is that it will probably be 10% of the purchase price (£10,000).

It might sound like I’m labouring a simple point here, but the problem often crops up because both the buyer and the solicitor walk to each other with a clear understanding with what they mean by the deposit – but both meanings are different.

What about a chain of transactions – what happens then?
So what happens if you have a chain of transactions – i.e. A is selling to B who’s selling to C who’s selling to D. In theory each buyer would take the deposit coming in on their sale and have to make it up to 10% before passing it over on their purchase. That is actually the correct situation and some sellers will insist on this (and they are perfectly entitled to). The normal course of events however is that whatever deposit is handed over at the bottom of the chain (i.e. by the first time buyer) is then passed up the chain, so the people in the middle of the chain don’t have to find anything extra for their deposit.

Holding deposits – paid to the Estate Agent
Sometimes Estate Agents may ask for a small deposit to ‘hold’ the property for you, or as an expression of goodwill. BEWARE! Handing over of a deposit at this stage does not bind the seller to sell to you at all. They can sell elsewhere and you can do nothing about it. Even though our advice would be not to do this, you may still want to do it (if it’s not a large amount) because you are wanting to keep the estate agent sweet. However it is generally only the estate agent who would benefit from this by having the holding deposit money in their bank account, earning them interest. You should be able to get your deposit money back from the estate agent if it all falls through, but if you haven’t handed it over in the first place then you won’t need to worry about getting it back will you?

Giving a ‘holding’ deposit direct to the seller
No no no no no no NO! We have had clients that have done this (years ago now) – they have fallen in love with a house and in an effort to convince the seller that they are deadly serious about it they have given them tens of thousands of pounds in cash. This is about as risky as you can get. The seller can take your money and spend it on a new car, and then sell the property to someone else. In these circumstances you could sue the seller for your money, but that’s never ever ever as good as holding onto the money in the first place. As an example the seller could clear off massive gambling debts with your money – when you sue them they own nothing and the house is in negative equity. You’ll get nothing, apart from a legal bill when you try and get your money back.

I’m painting a black picture here but it’s important that you understand the risks involved. NEVER give a deposit direct to the seller. As a final reason not to do it, handing a deposit direct to the seller is a recognised warning sign under money laundering regulations – which could in turn trigger you being reported for suspected money laundering.

I hope this clears a few things up – if you’ve got any questions about it then post a comment and I’ll try and answer it


Cheers


Mark

6 Responses to “What do you think ‘DEPOSIT’ actually means?”

  1. Dan says:

    I have a 75% mortgage and am funding 25% independently for a property I am about to exchange on. This misundestanding has just cropped up. The 25% will go to the purchase of the property, how do I fund the conveyancing deposit if the mortgage depoist is all I have? Can the mortgage deposit be used via the conveyancing deposit to fund the purchase price?Is it possible to draw the 10% from my mortgage prior to closing?

  2. Sladey says:

    Hi there,Doesn't sound to me like you've actually got a problem. I'm presuming you've got the 25 saved somewhere. Just take the 10% out and let your solicitor have that when you're nearly ready to exchange contracts. The rest of what you'll need to put down (which will the other 15%) will need to be paid over by the completion date. At that stage normally you'll also pay your solicitors fees, Land Registry fees etc. The 10% you hand over on exchange comes off the purchase price you have to pay at the end of the day.Let me know if this hasn't answered your queryCheersMark

  3. Dan says:

    Hey Mark,This is exactly what I was hoping for, just wanted to be sure I wasn't facing an issue shortly! Thanks for your quick answer, as you can probably tell, I'm a first timer!Dan

  4. Sladey says:

    No worries – glad to be of help. Give us a chance to quote for your work next time you move. Good luck with the move! If you want to know any more have a read of our beginners guides (at http://www.fidler.co.uk/conveyancing/guides/guidep.cfm) – this sets out the whole process in plain english. I know it can be pretty scary but it's also pretty exciting! BTW I think you're probably buying at the best time – I can only see prices going one way from here onHope that helps and good luck with your moveMark

  5. Anonymous says:

    hi markwe sould have exchanged and completed on our sale today. the other sides solicitor has the mortgage money in his account but our buyers have failed to give him the deposit money – what happens?

  6. Sladey says:

    I had a comment appear on the blog yesterday but for some reason it hasn't been published. The comment is:-hi markwe sould have exchanged and completed on our sale today. the other sides solicitor has the mortgage money in his account but our buyers have failed to give him the deposit money – what happens? My answer to this is:-Sorry to hear about your predicament – the whole thing currently rests on whether or not contracts have actually been exchanged or not. If they haven't then I'm afriad there is nothing you can do to make them move forward – they could pull out even at this late stage with no comeback on them. If contracts have been exchanged then everything is different – they are legally bound to complete on the completion date (which will have been entered into the contract) and if they don't then you can potentially keep the deposit they have paid and sue them for any additional losses you incur. It would normally never get to that stage and the defaulting party is charged interest for every day they are late in completing.So: – if you haven't exchanged then the only thing you can do is talk to them nicely and get it moving forward by agreementIf you have exchanged then you can take a harder line because the contract is on your side – your solicitor will be able to advise you what you can do in relation to this.Hope this helps, and no idea why the comment didn't publish

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