Buyer’s contract negotiation guide—deposits
Buyer’s contract negotiation guide—deposits

The following Property guidance note provides comprehensive and up to date legal information covering:

  • Buyer’s contract negotiation guide—deposits
  • Purpose of a deposit
  • How much deposit is payable?
  • Requirement to ‘top up’ the deposit to 10% in the event of default
  • Specifying methods of payment of deposit
  • Stakeholder or agent—how should seller hold the deposit?
  • Who gets any accrued interest?
  • Risk of deposit being struck down as a penalty
  • Law of Property Act 1925, s 49(2)—can it be excluded?
  • Preliminary pre-exchange deposits

Purpose of a deposit

A deposit serves two purposes:

  1. as the seller’s security for the buyer’s performance of the contract

  2. part payment of the purchase price when the sale completes

If a sale does not complete because of the buyer’s default then the seller is entitled to forfeit the deposit. Accordingly, the deposit gives the seller comfort that the buyer will perform. For a discussion of deposits and the terms upon which they are paid see Practice Note: Payment of deposit.

How much deposit is payable?

10% of the price is standard, but sometimes parties will agree 5% (perhaps in high value transactions where 5% is still a significant sum or where the buyer is a trusted institution). Some reputable institutional investors will not pay any deposits at all. It is helpful if the level of deposit is recorded in the heads of terms to avoid argument at contract stage. If no deposit is paid there should be an acknowledgment of that in the contract.

Requirement to ‘top up’ the deposit to 10% in the event of default

Condition 9.8.3 of the Standard Commercial Property Conditions (SCPCs) (Third Edition) provides for any deposit which is less than 10% of the price to be increased to a sum equivalent to 10% if a notice to complete is served by