Paying deposits by installments – vendors beware

Posted on December 19th, 2016

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It is increasingly common in contracts for the sale of land, for vendors to accept less than the traditional 10% deposit. Commonly, contracts contain clauses to the effect that, although the deposit remains 10%, a smaller sum is payable on the exchange of contracts and the balance of the 10% remains payable – typically at the time of settlement.

Problems can arise when the contract does not settle due to default by a purchaser. The vendor has not received (and cannot retain) the full 10% deposit. Claims to recover the outstanding part of the deposit are often defended on the basis that ordering payment of the balance of the deposit would be a “penalty” and is therefore impermissible. 

The NSW Supreme Court recently dealt with just such a case. It decided that any unpaid part of a deposit could only be recovered where it could properly be characterised as an “earnest” for completion of the purchase, by the purchaser. On the particular facts the unpaid part of the deposit was not an “earnest” and therefore could not be recovered.

Whilst it remains possible to draft sale contracts so that a deposit payable by instalment is properly characterised as an “earnest”, it is difficult to do so. Vendors of property should therefore be wary about accepting less than a full 10% deposit because of the risk that if the purchaser defaults and does not complete the purchase, any outstanding part of a “deposit” might be unrecoverable: Kazacos v Shuangling [2016] NSWSC 1504.


Tony Cavanagh Director at Mullane & Lindsay Solicitors NewcastleTony Cavanagh is a Director at Mullane & Lindsay Solicitors and practises extensively in Commercial dispute resolution and litigation, and employment law. If you require any assistance in these areas please contact Tony Cavanagh or contact our Newcastle or Sydney office. 

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