Non-Refundable Deposits/ Money Down/Reservation Fees on Properties - What are the potential pitfalls to you the buyer?

pre contract deposits

We're all familiar with paying non-refundable deposits for certain things - for example hotel bookings, where we know that if we later decide to cancel our booking for whatever reason we accept that we will not get that money back. The reason hotels and hotel agents can sometimes take these payments is to compensate in the event the guests don't turn up.

When it comes to property, pre-contract deposits and reservation fees are less common however they do still happen.

"Reservation fees" are usually the norm on new build properties to reserve the property. If you don't buy it the developer gets your reservation fee.

A "pre-contract deposit" is any sum paid by a buyer held by the agent on trust for payment to the seller in the event of non completion.

Generally they come about as a result of a bidding war breaking out where one or more buyers offers to put "money down" to make their offer look more attractive to the seller, and as a sign of their commitment. The deposit would go towards the purchase price on completion and as compensation to the vendor if the buyer were to pull out.

Although we as estate agents don't like dealing with pre-contact deposits (due to the potential problems further down the line) agents do have a duty to put all offers to their client (the seller). In the event of a sale collapsing in this case, the estate agent acts as a stakeholder and passes the pre-contract deposit to the vendor; the estate agent would not make a penny out of the transaction.

Any set up of the pre contact deposits agreement where an estate agent keeps the money in the event of collapse, rather than the vendor, contravenes the estate agents' code of practice of the Property Ombudsman.

Should a buyer pay a non-refundable deposit?

We would strongly advise all buyers to think long and hard and take legal advice before making any such offers.

Buying a house is often a very emotional process, and buyers can get swept up in their excitement to get the house of their dreams. However the stakes are high for the buyer, as generally the deposit you will be paying will be £100's or £1000's and you need to be prepared to lose this money in the event of the sale not happening for whatever reason.

What's more there are a lot of things that can go wrong in a property purchase prior to exchange: you may not be able to get lending from the bank as you thought, your buying situation may change, you may need to move for work or even lose your job. Then of course there could be worrying things a house survey throws up. If anything does happen like this and you as buyer can no longer purchase after you have offered to pay a reservation fee or pre-contract deposit, you could well lose your money which causes a lot of upset all round.

A solicitor will be able to draw up some terms and conditions relating to the deposit. The vendor may have some conditions themselves, such as the buyer should be ready to exchange and complete the purchase by an agreed date or they automatically forfeit the deposit.

If things go wrong

Unless clear terms and conditions had been drawn up, there is little recourse for buyers to reclaim their deposit. If you have offered to pay a non refundable deposit/reservation fee it's exactly what it says on the tin, it's non refundable. This is why very serious consideration should be given by buyers before offering or agreeing to make any of these payments.

As agents, these deposits are more often than not a real cause of headaches for us. Agents who act as stakeholders are usually left in the middle of any dispute that breaks out in the event of a non-completed purchase.

Many buyers assume the agent keeps the deposit, or benefits in some way if the buyer pulls out, which should not be the case.

Our advice would be to seek legal advice in the first instance before entering into any of these agreements. If in any doubt or if you are not 100% prepared to forfeit the money in the event of a collapse of purchase do not pay.

Published on 28 January 2016

Source Trinity Sales Wakefield

Content © 2017 Trinity Sales    Website Built by Estates IT Limited   Powered by PCHomes Estate Agent Software    +Site Map    Privacy