As property prices continue to fall in New Zealand there is a real risk that some property owners will end up in a negative equity situation (ie property worth less than what owe bank). This is risky for prospective purchasers, when these negative equity property owners decide to sell their property, as the purchasers deposit becomes at risk of being lost.
In the sale and purchase of property a deposit is typically paid by the purchaser as part payment towards the property and is seen as an incentive for the purchaser to settle on the settlement date. However, it is fully refundable to the purchaser if the vendor fails to complete settlement on the settlement date.
A deposit can be any amount the purchaser is willing to pay and the vendor is willing to accept. However, most agents recommend that the purchaser pay a deposit of between 5%-10%.
The deposit is either paid to the real estate agent or the vendor’s solicitors. Upon receiving the deposit, they must hold the deposit until all of the following have occurred:
- (a) The title requisition period has lapsed;
- (b) All conditions are fulfilled; and
- (c) If the property is a unit title a pre settlement disclosure statement has been provided.
If the deposit is paid to a real estate agent, then under section 123(1) of the Real Estate Agents Act 2008, the agent is required to hold the deposit for at least 10 working days after receiving it (even if all the above are met) unless the parties agree it can be released early.
As is common a purchaser will often be asked to authorise early release of the deposit before the above have been met or the 10 working days are up. Especially where the vendor is on buying and needs the deposit for their purchase. What we also see happening is the vendor will have clause included in the agreement that the deposit will be immediately released to the vendor and the purchaser consents to this.
In the current market this could be risky for purchasers. Upon a deposit being released the agent will deduct their commission and pay the balance to the vendor. If the vendor has a mortgage, then on settlement the sale proceeds need to be sufficient to repay the bank. If the sale proceeds are insufficient, then the vendor cannot settle. If the vendor cannot settle, then the purchaser is entitled to cancel and receive a full refund of their deposit but if the deposit has been released then how does the purchaser get their deposit back?
The purchaser would have to issue court action to recover the deposit. However, if the vendor has negative equity, then this could be pointless course of action as bank would take priority in bankruptcy and purchaser could be left with nothing.
So how can purchasers protect themselves? We recommend that if you have concerns over a vendor’s ability to settle then you have a clause included in the agreement whereby the deposit is not released until settlement. This is strongly recommended in the situation where you are buying off the plans (ie the vendor is building a dwelling on the land and selling it as a completed property) or where the vendor is not the current registered owner.
If you need any assistance with reviewing an offer before submitting it, then please contact the team at Collins and May and we can assist to ensure the agreement best protects you.
