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When real estate is purchased, the “deposit” is a payment made by the purchaser at the commencement of a transaction to indicate that the purchaser proposes to complete the transaction.

In a conveyancing transaction the deposit is usually paid at the time that the contract is signed by the purchaser and is usually 10% of the purchase price (it can be as low as 5% or as high as 20%, depending on the vendor and the type of property being purchased). This is a show of good faith that the purchaser a) is committed to the purchase and b) generally has (or expects to have) the funds to do so. If a purchaser fails to complete the contract, it is expected that the deposit will be forfeited to the vendor. If the vendor fails to complete the contract, it is expected that the deposit will be returned to the purchaser.

Special provisions exist to ensure that the deposit remains secure during the course of the contract so that it can be returned to the purchaser should the vendor fail to complete. If the deposit is released, and the vendor spends these funds, there may be an inability of the vendor to return the funds if the contract fails due to the vendor’s default.

On occasions the vendor seeks the early release of the deposit. Usually this request is made to use the deposit from the sale to then put a deposit on a property being purchased at the same or similar time. Sometimes it is to fulfil a large debt to avoid penalties and interest, sometimes it is to buy goods and materials for private use. If it is an integral part of the transaction then so be it. However whilst the risk of trouble is small it is not considered wise to do so as in the event of default it may be difficult to get it back from the vendor and deposit bonds are readily obtainable.

SECTION 27 STATEMENT

If there is a mortgage affecting the land sold, the information required to release the deposit is to be given in the form prescribed, known as a deposit release statement. Whilst this information must be in writing, the vendor is not required to sign the form.

A purchaser then has 28 days from receipt of the information to object to release. It is permissible to include the information in the contract documents so that time begins to run from the commencement of the contract, although this is generally only done if the vendor knows ahead of time that the funds are required for a related purchase.

It is appropriate to ask the purchaser to sign an acknowledgment of receipt of the information with the contract, but it may be inappropriate to ask the purchaser to sign a deposit release at that time, although the two documents are frequently sent as a bundle for simultaneous signature.

GROUNDS FOR OBJECTION TO EARLY RELEASE OF DEPOSIT

The deposit may be released only if:

* there is no condition enduring for the benefit of the purchaser (see above);

* the purchaser has accepted title, or may be deemed to have accepted title;

* the purchaser has given consent, or failed to object within 28 days.

A purchaser may object to release of the deposit by notice in writing within 28 days of receipt of the vendor’s notice. The objection must be ‘in writing stating that he is not satisfied with the particulars and giving the reasons why he is not satisfied’. The objection must therefore relate to the particulars. A purchaser might not be satisfied if the particulars reveal that the vendor’s mortgage amount is higher than the sale price, or close to it and potentially rising if there is a default or ability to draw down more funds. Generally speaking, if the mortgage is in default, the bank will state this clearly and will advise that they do not agree to the deposit being released. The bank is generally the first one in line to be paid when a house is sold. It is not sufficient to object purely to attempt to retain the deposit in the agent or solicitor’s account for safekeeping; it must be a serious/ substantial objection.

FORFEITURE OF DEPOSIT

It is possible for the parties to agree that the deposit will be non-refundable.

If the purchaser defaults in performance of the contract, the vendor is entitled to claim the deposit. If the deposit has been paid, it is forfeited to the vendor. If the deposit has not been paid, the vendor is entitled to sue for it even though the contract has been terminated.

Whether or not to seek the early release- as a vendor- or to object to the early release- as a purchaser, is a matter which you should carefully discuss with your lawyer. In a current trend, many agents are asking that the s27 statement be prepared as a matter of course, so that they can receive their commission earlier than the settlement date. An early release is not mandatory.

EXAMPLE OF A COURT CASE ON THE ISSUE

In McEwen v Theologedis [2004] VSC 244 the purchaser objected to the request to release deposit. A contract of sale was signed on 16 May 2004 and a deposit of $ 68,000 was paid to the agent as stakeholder. On 24 May a s.27 statement was served by the seller’s lawyers with a statement from the mortgagee bank which confirmed the balance of the mortgage and noted that there was no provision for further advances.

On 9 June the purchaser objected to the release of their deposit. They gave notice stating that the purchaser could not be satisfied with the particulars because the adjusted purchase price after adjustments for unpaid rates and taxes might be insufficient to repay the mortgage.

This is what Judge Hollingworth had to say:

(a) On the proper construction of section 27, the purchasers’ reasons must reflect the matters set out in subsection (4). That is to say, the purchasers may only have regard to the accuracy of the particulars and the sufficiency of the purchase price to discharge all mortgages over the property. A purchaser may not refuse to authorize the release of the deposit on any other ground.

(b) Section 27(4) concerns itself with whether “the purchaser is satisfied”, not with whether “a reasonable purchaser would be satisfied” or “the purchaser is satisfied on reasonable grounds”. Subsection (6) is likewise concerned with the situation where “the purchaser is not satisfied.” It does not matter that the purchaser may be proceeding on erroneous facts or assumptions; only that he or she be satisfied or not satisfied of the relevant matters. (at [25])

(c) Section 27 provides that a purchaser can only rely on reasons given in a written notice. The written notice either complies on its face with the requirements of subsection (6) or it does not. The purchasers can not later seek to rely on reasons which were not given in the objection notice. (at [26])

(d) The wording in the objection notice does not have to slavishly follow the wording in subsection 4(b), but the notice must be clearly referable to one of the matters in that subsection.

Therefore a purchaser cannot give his/her reason for objection under subsection (6) either that:

-the contract contains conditions which are for the benefit of the purchaser (eg finance conditions); or

-title has not been accepted and is not deemed to have been accepted (although a signed acknowledgment by the purchaser as per below point (ii) will negate that possibility anyway.

The Purchaser HEREBY ACKNOWLEDGES that:

(i)The particulars provided by the Vendors in this Statement are accurate; and

(ii)The particulars given indicate that the purchase price is sufficient to discharge all Mortgages over the property;and

(iii)The Contract is not subject to any condition ensuring for the benefit of the Purchaser;and

(iv)The Purchaser FURTHER ACKNOWLEDGES that he has received satisfactory answers to Requisitions on Title or is otherwise deemed to have accepted title.

TITLE INSURANCE

The risk to a purchaser of an early release of the deposit under s.27(7) of the Sale of Land Act may be counteracted by taking out title insurance. Such an insurance policy is not expensive and will cover risks such as defects in title, problems getting zoning certificates in time, and other risks which are not reasons to object to early release of deposit.

This article has been written to apply to the property laws of Victoria, Australia and therefore refers to the Property Law Act 1958 (Vic) and may not apply to other states in Australia. It is not to be construed as specific legal advice to anyone, only general information to the public.

Maria Rigoli is a practising lawyer of 22 years experience and the founder of Rigoli Lawyers. Maria’s specialty areas of practice range from family law disputes to deceased estates to complex property matters.

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