A deposit amount is a matter for negotiation between the parties. Whilst the customary figure is 10% it need not always be the rule.

The Auckland District Law Society and Real Estate Institute of New Zealand Agreement for Sale and Purchase template (ADLS Agreement) provides that a vendor can retain a maximum 10% deposit when a purchaser defaults and does not settle. It should be understood that this is a starting point. Higher deposits can be negotiated and will be enforced by the courts.

Negotiating a robust deposit

So what is a reasonable amount? While there is no hard and fast rule, as it is determined on a case-by-case basis, case law is useful. At the higher end of the spectrum, courts have found that deposits of 40% and 50% of the purchase price were unable to be retained by vendors. In one case, the courts explained that the deposit “was far in excess of what was a reasonable sum to be forfeited” and penal in its nature for breach of a contract.[1] By contrast, in other cases deposits of 27% of the purchase price[2] and 21% of the purchase price,[3] were found not to be penal and vendors were able to retain the deposit after the buyers defaulted.

Too little

While these cases are all based on their specific factual circumstances and merits, they do suggest that vendors are able to negotiate deposits of up to 25%. This is still within the allowable range considered not to be penal by the courts. In light of these decisions, developers should not feel bound by the ADLS Agreement’s suggested 10% deposit rate. In a buyer’s market, the risk of default by the buyer is often higher. The 10% is sometimes simply not enough to lock buyers in.

Too much

A developer can achieve greater certainty of settlement by negotiating a higher and more robust deposit rate. This must be done at the outset, when the sale and purchase agreement is signed. They should keep in mind that asking for too high a deposit may backfire and make funding banks nervous. It is therefore important to consider the market and all other unique circumstances of the sale before determining an appropriate deposit rate.

We can help

We have considerable expertise negotiating deposits on behalf of clients and advise on all property related matters. Call us on (09) 375 2770 for practical legal guidance.

 

[1] Stockloser v Johnson [1954] 1 QB 476 and Smyth v Jessup [1956] VR 230

[2] Coates v Sarich [1964] WAR 2

[3] Tropical Traders Ltd v Goonan (No 2) [1965] WAR 174