In Sydney, it has become a regular occurrence to sell properties with only a 5% deposit to secure them. To protect their clients, solicitors have traditionally put a clause in contracts to state that the deposit will be paid in two installments, one on exchange and the other on settlement. Alternatively, some solicitors will generally state that where the deposit is not fully paid on exchange, it will be paid at settlement or upon termination.

LawCover, solicitor’s insurers, have written a newsletter this week that solicitors should be mindful of the risks involved with this practice. LawCover point to the case of Boyarsky v Taylor (2008) Where Brereton J indicated that, where the deposit needs to be paid upon settlement, it is a penalty.

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What does it mean if it’s a penalty? Simply that it must reflect the true loss of the vendor. It is considered that, if the vendor goes on and sells the property again, they will get the benefit of that 5% from somebody else’s deposit. Therefore, they’ve lost nothing and there is no true reflection of loss.

The upshot of the decision in Boyarsky v Taylor is that, if a purchaser pays less than 10% and they do not settle, the best the vendor can hope for is to only get 5%.

LawCover has told all solicitors that they should make clear to all vendors, in writing, that if they have taken a deposit of less than 10%, 10% is all they can expect. In other words, if you exchange at 5%, and the purchaser doesn’t settle, all you can expect to get is 5%.

It is a practice that we at Leverage Solicitors are definitely going to take up now, because if we don’t, we are likely to have a claim refused by LawCover. I suggest that all solicitors do the same. This letter in itself will turn most vendors off the 5% deposit.

This article was written by Bailey Compton, Principal Solicitor & Director at Leverage Group.

To get in touch with Bailey, please email info@leveragegroup.com.au or call 1300 438 538