The short answer is “No!” – but of course, the longer answer is never that simple.
Many property sale contracts include a condition that the Purchaser must release the deposit paid to the Vendor upon exchange of contracts or if the Vendor requests release. Sometimes it has just been included as a standard condition and is not actually required, so it pays to ask for deletion of the clause.
Sometimes Vendors insist on the contract containing a release of deposit clause and Purchasers who have fallen in love with a property take a calculated risk when they are buying an existing property on a short settlement and agree to enter into that contract. In these cases, we always ask the Purchaser to sign a letter acknowledging that we have given the same advice we’re giving you in this post!
Sometimes, the Vendor wants release of the deposit specifically so that they can use it for the deposit on their own purchase or for stamp duty, and there have also been cases of developers requiring immediate release of the deposit, presumably to help fund their development costs.
Despite what you may have been told, such an arrangement is seldom essential, since the Vendor should be able to obtain a deposit bond for their own deposit if they don’t have enough cash assets to fund it.
What’s the worst-case scenario?
In order to properly consider the advisability of release, it is necessary to look at the worst-case scenario of what happens if you have to rescind or terminate the contract, which can happen for a variety of reasons. How do you get back your deposit? If the deposit is held in an agent’s or lawyer’s trust account, it is a simply matter of it being refunded. If it has been paid as a deposit or for stamp duty on the Vendor’s own sale, it may be very difficult to get it back and you may be engaged in costly and lengthy court case to do so, with uncertain results. In the meantime, you may be unable to move on with your life and to purchase an alternative property.
Alternatively, if the release of deposit clause is totally open and does not even restrict the Vendor to only being able to use the deposit for their own deposit or for stamp duty, the Vendor could just take the funds to the races and blow it! No amount of litigation will get that back if the Vendor does not have sufficient assets to satisfy a judgement against them.
If you are entering into an off-the-plan contract with a developer who requires the deposit to be released immediately, then the funds may be used to progress the development. If the developer goes bust or the contract has to be cancelled for some other reason, it may well be that your deposit has simply been poured into a hole in the ground from which it is not recoverable.
It is always our strong advice that purchasers do not agree to a release of deposit on exchange.
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