Non Refundable Deposits for Property Purchases

Sometimes, sellers or their estate agents require payment of a non refundable deposit or reservation fee before they will accept your offer to buy a property.  Should you pay?

This usually arises in a competitive market where the Seller is looking for a buyer to show serious intent.  A seller may be concerned that they will incur costs and lose other potential buyers if you withdraw before exchange of contracts.

Ideally, you should be able to convince the Seller of your ability to buy without the need of paying a non refundable or reservation fee when making your offer.  You should try to resist paying an initial deposit if you can.

95% of residential estate agents  have signed up to the Property Ombudsman’s Code of Practice for Registered Estate Agents.  This states that unless requested by a property developer, the estate agent should not generally facilitate pre-contract deposits. However, if they do, they  must take into account specific instructions from sellers. Before a deposit is taken, the circumstances under which the deposit is to be held, refunded, forfeited or used towards the purchase, must be clearly stated in writing, agreed by the relevant parties and a copy of the agreement provided to those parties.

However, it is often the case that such an agreement does not give a buyer sufficient protection if the purchase falls through.  If you do need to pay a deposit in order to secure the property, then you should ask that the deposit be held by the Seller’s solicitors as stakeholders.  That way they must pay back the money if the matter does not proceed to exchange of contracts.  Alternatively, ask for an exclusivity or lockout agreement to be drawn up or checked by your solicitor.   While there are some solicitors who are resistant to this, there is usually no reason why a straightforward agreement cannot be drawn up and agreed within a few days.

What are the usual main terms of an exclusivity or lockout agreement?

• They give the Buyer exclusivity for a fixed period of time in return for which you pay the deposit.
• The Seller must instruct their solicitors and agents to abide by the terms of the exclusivity agreement and not seek other buyers for the property or actively market it during the exclusivity period.
• The Seller’s solicitors must send the contract and title documents to the Buyer’s solicitors as quickly as possible and deal promptly with any enquiries raised by the Buyer’s solicitors.  The Buyer must instruct their solicitors to  deal with matters as quickly as possible and arrange for any survey or other reports to be prepared as quickly as possible.
• The Buyer must arrange any mortgage finance needed to buy the property as quickly as possible.
• Termination:  the Buyer can usually terminate if they discover something major about the property that is unsatisfactory.  This would usually include a serious defect in the Seller’s title; or the Buyer’s searches reveal any matter that has a material adverse effect on the market value of the property.

In such circumstances, the deposit must be refunded to the Buyer. The Seller can terminate if the Buyer is in breach in which case the Buyer will lose the deposit paid.

If the Buyer can demonstrate that the lockout agreement has been breached, by the Seller, the usual remedy is to claim the abortive costs of the transaction.

Conclusion

Exclusivity or lockout agreements are not ideal and may not be completely watertight, but they do offer a much higher level of protection for buyers who are in the position of having  to pay a non refundable deposit.  They are preferable to  having no agreement at all or a basic form prepared for signature by the Seller or their estate agent.  Legal advice should be sought before paying any deposit or signing any agreement to pay a deposit.