About Deposits for those Selling and Buying

This is to explain the significance of the deposit in the sale and purchase transactions from both the seller’s and buyer’s point of view.  Even if you are only buying or only selling, the explanation may still be useful.

What is a deposit?

This is the sum (never more than 10% of the price) paid by the buyer when contracts are exchanged.   The main purpose of it is to be a practical demonstration of the buyer’s seriousness in proceeding.   We have to hold onto the money and not pass it on to you, but if there is a related purchase it can normally be used to fund the deposit on that purchase.   Our professional rules control how we handle such money and the buyer wants the reassurance that if the seller does not complete, the buyer can eventually get his deposit back.

A lot of people refer to the deposit as the difference between the price and their mortgage amount.    This is not the way solicitors use the expression.

Why do we need a deposit?

Basically, the answer is to provide money that the seller can keep if the buyer does not go ahead, after having entered into a binding agreement to do so.

If the buyer does not complete on the date agreed (which is quite rare) the seller’s solicitors can serve a notice requiring completion within (usually) 10 working days.   In most cases the buyer then completes within a day or two, the delay usually having been caused by some slip up in getting the funds in time.   In very rare cases the buyer doesn’t complete by the end of the notice period and the seller can then forfeit the deposit and the contract comes to an end.

Where does the money come from?

The buyer has to provide it.   No part of any mortgage loan can be used for it, as at the time the money is provided the buyer does not yet own the property, and so cannot mortgage it to his lender as security for his loan.   People who are selling and buying often have all their money tied up in their present property and are going to use its sale money plus perhaps a bigger mortgage to buy their new property.

If the buyer has nothing to sell his solicitors will ask him to provide 10% of the price or, if he is getting a mortgage loan of more than 90%, the difference between the loan and the price as a deposit.   Usually this will be 5% or more.

If a buyer is selling a property and hasn’t added any savings of his own, then the deposit offered is the amount that his buyer has produced, which as a rule of thumb, might well be 5% of that buyer’s sale price.   The principle extends down the chain with each link to the amount provided by the buyer at the bottom.

Because people typically rely on getting a larger loan from their Bank or Building Society, it is often the case that people in the middle of Conveyancing chains do not have any significant savings to supplement the deposit provided by their buyer.    You may well be in this situation, which is very common.   This only usually matters if there is a big difference between the sale and purchase prices in question or the buyer is providing a very small deposit or no deposit at all.   We will let you know if we think that a contribution from you towards the exchange deposit may be needed, but unless you hear from us about this, please assume that this will not be the case.   However, if you have any savings that could be used, it would be sensible not to commit them to other expenditure because sometimes we find that we will need you to provide some funds at this stage.

What’s the benefit of getting a full 10% deposit?

The main benefit is to protect the seller if the worst happens and the buyer does not complete at all.   The more of the buyer’s money the seller’s solicitor can forfeit on his client’s behalf the more able the seller is to meet any wasted legal and estate agents costs (the agents will want paying because their commission will still be due) and the seller may have some cushion against any loss made in the event of a subsequent sale for less than previously.

Although these rights exist for each link in a Conveyancing chain, in practice it is the seller at the top who is most likely to be in the position to exercise them, and actually keep the money if someone below fails to complete, but there is a knock-on effect right down to the person who has caused the problem.   Of course, it is very important to bear in mind that it is very rare indeed for a transaction not to complete at all and for all this to have any relevance.   For most people, therefore, as long as the deposit being offered on the sale is not ridiculously small, its precise size is only of academic concern.   Whilst we have to explain these things, you should read this explanation in its proper context.

Our Suggestion for those selling

Unless we have explained otherwise in a covering letter we suggest that:

  • if your buyer is not selling a property you accept a 5% deposit; and
  • if he is selling a property you accept 2.5% or £2,000 whichever is the greater.

Unless we hear from you to the contrary we will assume that you have agreed these guidelines and will proceed accordingly.    Obviously, we will still try to get as much as we reasonably can, given the constraints mentioned above.

Why all this explanation?

Unfortunately, judges have decided that a solicitor is negligent for not requiring a full 10% deposit.   We think this is unreasonable, but we have to explain it all to you so that you understand the position and can instruct us to require the full 10% if you are not prepared to take what we feel is the very small risk involved.   Of course, if you did ask for it then you might find there was at best a delay while the buyer found the money, and at worst, the buyer would simply be unable to proceed.

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