|Releasing a deposit to the seller prior to settlement is always risky. If a deposit is released prior to settlement the purchaser is deemed to have accepted title.
On signing of the contracts many selling agents will attempt to get the buyer to sign what is known as a Section 27 release of deposit statement. Provided certain conditions are met, signing this document will result in the deposit being released to the seller prior to settlement.
Most selling agents are eager to have the Section 27 form signed by the buyer as this means they are likely to receive their commission earlier.
The greater majority of settlements finalize smoothly, however things can turn pear shaped between signing of the contracts and settlement.
An example of this is the vendor borrowing against the property after contracts have been signed. This can result in the vendor not being able to provide clear title to the buyer.
Some property transactions don’t proceed to a successful settlement. If the buyer has released the deposit to the vendor it may be that the only recourse to claw back the deposit is through expensive litigation.
Off the plan purchases provide a greater risk for buyers in relation to their deposit. This is because in most cases property titles have not been registered at the time a deposit is paid.
Does the seller actually own the land? Is the developer at arm’s length from the person holding the deposit as stakeholder? Does the developer have a genuine intention to undertake the project? Will the developer invoke an unfair sunset clause and terminate the contract? How is a buyer able to ascertain the quality of a dwelling that is not yet built?
These are murky waters as unsuspecting buyers found out recently in Officer, an outer eastern Melbourne suburb.
A developer took deposits from buyers with the promise of delivering house and land packages. The problem was the developer didn’t own the land. The development company has since gone into liquidation and buyers are likely to lose their deposits.
To safeguard buyers in an off the plan purchase, deposits should be treated the same way as a tenancy bond i.e. held in trust by a government authority.Tenant bonds are paid to the Residential Bond Authority.
This system has prevented landlords from unfairly retaining bond monies when a dispute with a tenant occurs.
A purchase deposit is substantially more than a tenancy bond and therefore buyers should be protected in the same way.
Property buyers should always seek advice from their conveyancer or lawyer before paying or releasing deposit monies.