Advice to a selling client on a request for a reduced deposit

 

Thursday, 18 December 2014

Accepting a reduced deposit on a sale transaction without explaining the risks and seeking a client’s explicit instructions could expose you to a costly professional negligence action if the transaction fails to complete ( see Morris v Duke Cohan ( 1975) 119 SJ 826) . 

The question all practitioners should be asking is whether the seller will be adequately compensated for any loss on an aborted transaction post exchange of contracts.

So what sort of advice should in these circumstances be given?

The advice we give is in the following terms and is designed as can be seen to ensure that the seller client has been given written advice on the risks in the hope that the client can then make an informed decision on the request.

‘Your buyer(s) is asking to pay a deposit on exchange of contracts which is lower than the sum normally payable, that is 10% of the purchase price. 

The deposit is either paid to us (for us to hold) on exchange of contracts, or is held by the seller solicitors to our order.  That is to say, the seller’s solicitors would be required to pay the deposit to us if and when requested.  They would not be able to refuse or release the deposit to the seller.

We are under a duty to bring this to your attention and to seek your written instructions on the request before proceeding.

The main reason why a deposit is paid is because, if your buyer fails to complete the transaction  ( which is rare but not unknown) , you can forfeit the deposit ( that is keep it) which can then be used to cover your abortive sale costs, the cost of re-sale, and also if necessary the cost of  interest on a bridging loan if you have a related purchase and wish to continue with that transaction. 

For this reason we always advise that the full 10% deposit should be paid so as to ensure that if the transaction does not complete you will not be out of pocket. 

If you were to accept a 5% deposit for example, then if the transaction did not proceed to a completion you would still be able to claim the other 5%,  but as this is not held by us or by the buyers solicitors to our order, you would have the inconvenience and cost of having to take the buyer to court to collect the unpaid part of the deposit.  You may also find that the sum which you do have access too is wholly inadequate to compensate you for your loss.

The purpose of this note is to explain the consequences of accepting a reduced deposit so that you can make an informed decision on the request before providing us with your written instructions.  For this reason if you would like us to explain the above in any further detail please feel free to contact us.

We now await your written instruction’.

David Pett – Director and Solicitor with MJP  Conveyancing 

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