What happens to your deposit when buying property?
Buying a property is one of the most significant financial decisions you'll make in your lifetime. Whether you're a first home buyer in Christchurch or an experienced investor, understanding the conveyancing process is crucial for protecting your interests and ensuring a smooth transaction.
Weston Ward and Lascelles’ Christchurch property lawyers have guided countless clients through the complexities of buying and selling property, but one area of the process is typically misunderstood by clients, and that is what happens to your deposit when you are buying a property. It’s an important aspect of property conveyancing, so this article is to fill in any gaps and help you navigate this element of the transaction.
Understanding property deposits in New Zealand
A deposit is an initial payment made by the buyer to the seller and represents a proportion of the total of the purchase price.
The deposit is usually payable on the purchaser confirming that all conditions inserted in the contract for the benefit of the purchaser have been satisfied i.e. the deposit is usually payable when the contract goes unconditional. But note auctions are different. If you have bought a property at auction the deposit must be paid immediately upon winning the auction, as typically auctions are unconditional on the fall of the hammer.
If you do not pay the deposit immediately after winning an auction, the vendor would immediately be entitled to cancel. But if you did not pay the deposit on a property (not purchased at auction) immediately after you confirmed that all conditions inserted in the contract for your benefit have been satisfied, this would not usually entitle the vendor to immediately cancel the contract. The vendor would first have to serve notice on you requiring you to pay the deposit within 3 working days or else!
A deposit serves as assurance for the vendor that the purchaser is serious about completing the transaction and offers financial protection to the vendor if the buyer defaults. For purchasers, it demonstrates good faith and secures their right to complete the property purchase under the agreed terms of the Sale and Purchase Agreement.
The legal process of paying your deposit
The process of paying a deposit in New Zealand follows strict legal requirements designed to protect all parties involved. Whilst agents often draw up Sale & Purchase Agreements with the deposit amount specified as 10% of the purchase price, there is no legal requirement for the purchaser to pay a deposit of 10% of the purchase price. Vendors will often accept a smaller deposit, especially if that smaller deposit amount is enough to cover the agent’s commission. So, a deposit of $25,000 might sometimes be acceptable to a vendor.
The vendor should require payment of a deposit amount that at a minimum is enough to cover their agent’s commission. Commission is only paid if the agent secures an unconditional sale. If the buyer later defaults, the vendor still owes the agent commission. Once you sign the Sale and Purchase Agreement, the deposit is typically paid to the real estate agent's trust account. However, there are important exceptions to this general rule:
A) If you are buying an off plan house and land package
The deposit funds must be paid directly to the vendor's lawyer's trust account, where hopefully the contract is worded to require the vendor’s lawyer to hold the deposit as 'stakeholder' until settlement occurs. There’s often a long timeframe between deposit being paid and settlement, and high risk of the developer entering financial difficulty, so it is important that the contract is worded to require the vendor’s lawyer to hold the deposit as stakeholder until settlement occurs.
Every house and land package contract is different, so it's essential if you are considering purchasing one of these, that you have experienced and trusted property lawyers review the entire agreement prior to signing to ensure the deposit is protected.
A) If you are using KiwiSaver funds to buy a property
The Sale and Purchase Agreement must be amended to include a clause confirming KiwiSaver funds are being used for the deposit. These funds are held in the seller's lawyer's trust account until settlement, with no possibility of early release. The timing between signing, confirmation, and settlement must give enough time for the KiwiSaver funds to be withdrawn.
What happens between signing and settlement?
The period between signing the Sale and Purchase Agreement and settlement is when your deposit enters a highly regulated holding pattern. Under current property law in New Zealand, until a deposit has been held by a real estate agent for 10 working days, the funds technically still belong to the buyer. This provides an important protection period during which purchasers retain certain rights over their deposit funds, crucial for if the vendor requests funds to be released early (see below)
Trust account protection and release conditions
The protection of deposit funds through strictly regulated trust accounts is a cornerstone of New Zealand's property conveyancing system providing security for both buyers and sellers. The real estate agents and lawyers who hold these funds are bound by professional obligations and regulatory requirements to ensure the money is properly safeguarded.
While the funds are held in the trust account, vendors can request an early release of the deposit, which is often used to fund the deposit on their next property. If you are a vendor and need access to the deposit funds, you will need to seek legal advice from your property lawyer to explore whether negotiating with the buyers is an option, and to confirm whether the bank approves the release. It is important to note that when a mortgage is registered over a vendor’s property that is mortgaged to the hilt, the bank might require the vendor’s lawyer to hold all of the deposit in their trust account until settlement, so funds are available on settlement to repay the mortgage.
Understanding the risks of early fund release
Within the first ten days of the deposit being made it is possible for vendors to request the early release of funds (less the commission owed to the agent). However, buyers are under no legal obligation to agree to this request. This decision should be made carefully having taken advice from their property lawyer, there are significant potential risks involved:
Loss of leverage: once the deposit is released, the buyer loses a key bargaining tool if issues arise before settlement.
Risk of vendor default: if the seller fails to settle or breaches the contract and a dispute arises, recovering the early-released deposit can involve civil litigation to recover the funds and the buyer may face complications or financial loss.
Reduced protection: the deposit system is designed to protect all parties. Releasing it early weakens that safeguard.
If as a Purchaser you cancel for a legitimate reason – says the house burns down after going unconditional but before settlement, the purchaser is entitled to cancel the contract and the vendor is under a legal obligation to fully refund the purchaser their deposit. But if the purchaser agreed to release their deposit early, the agent will have deducted their commission before paying the balance of the deposit to the vendor. Meaning, that the vendor might not have the financial wherewithal to full refund the purchaser their deposit.
For vendors, the risks are different but equally important to understand.
Take action to protect your finances
Modern property conveyancing in Christchurch and throughout New Zealand involves navigating increasingly complex regulations and contract terms. What might seem like straightforward deposit arrangements can have significant implications for your financial security and legal obligations. The timing of deposit payments and releases requires careful coordination between all parties involved in the transaction. Whether you're dealing with standard residential purchases, commercial property transactions, or complex house and land packages, each situation has unique requirements that demand professional expertise.
Don't leave your property investment to chance. Contact our experienced property law team in Christchurch today. Our comprehensive property conveyancing services are designed to give you confidence and peace of mind in one of life's most important financial decisions. Call 03 379 1740 or email enquiry@wwl.co.nz for all your conveyancing needs.
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