Penalties: Not just for footballers!

During a period of market uncertainty, such as the one that we have faced in the run up to Christmas, property sellers become increasingly worried about buyers defaulting. 

Particularly where there is a lengthy gap between exchange and completion, sellers are concerned that prices will drop and buyers will refuse to complete or seek to renegotiate more favourable terms. The seller will then be re-marketing the property in a weaker market where the return will be less than the initial deal. 

As a result, sellers can be tempted to request a deposit which is greater than the market standard of 10% of the purchase price. The seller knows that if the buyer defaults on purchasing the property, the seller can keep the deposit. As such the higher the deposit, the bigger the deterrent to the buyer, or so sellers believe. 

However, this is a risky move for the seller. A deposit which is greater than 10%, could be argued to be a “penalty” (not the kind seen in yesterday’s World Cup Final!). If a deposit is held to be a penalty, the seller would be obliged to return the entire deposit to the buyer (not just that bit of that deposit exceeding 10% of the purchase price). 

To keep a deposit greater than 10%, the seller will need to prove it is a genuine pre-estimate of its loss. No small feat! So sellers beware, if you want to ensure you can keep the deposit if the buyer defaults, stick to the market standard 10%.