I presume it is now commonplace to tender a buyer’s deposit within so many days of execution of the agreement of sale. While deposits once accompanied offers, the practice is no longer practicable given the electronic transmission of offers. And while it is perfectly legal for a buyer to tender a deposit days after the agreement has been executed, there can be problems.
A deposit serves several purposes, but chief among is that a meaningful deposit tends to hold the buyer’s feet to the fire. A buyer who stands to lose substantial money is less likely to terminate an agreement when the deposit can be held. This advantage, may be lost however, if there is a gap between execution of the agreement and payment of the deposit. The longer the gap the larger problem. Take, for example, a buyer who has five days to tender a deposit. If the buyer finds a more attractive property in those five days, what will the buyer lose by terminating the agreement of sale?
Most agreements provide at Paragraph 26 of the ASR that the seller is “limited to retaining sums paid by Buyer, including deposit monies, as liquidated damages” in the event of buyer default. Note that the agreement provides that the measure of damages is the “sums paid” and not sums that should have been paid or could have been paid! If the liquidated damage box is checked then the seller is without a remedy should the buyer default before the deposit is paid.
What can be done about this gap? Shortening the time between offer and tender of the deposit is one way to reduce this risk. We’ve conceded that it is not practical to tender the deposit with the offer if the offer is being transmitted electronically. Shortening the window that buyer has to pay the deposit, while not perfect, helps.
It is also in the seller’s interest if the seller does not agree to limit the buyer’s damages to deposits paid. In other words, leave the box founds at Paragraph 26(G), unchecked. It could be negotiated in the original agreement of sale that once the buyer’s deposit is received, that deposit will then serve as a liquidated damage as though the checkmark were entered in Paragraph 26(G) when originally negotiated. This would be accomplished by adding language to the original agreement that once the deposit is tendered pursuant to Paragraph 2, that the parties agree that thereafter the deposit will serve as a liquidated damage pursuant to Paragraph 26(G) of the agreement.
Deposits are negotiable in terms of their amounts and when they are to be paid. Both factors will have impact on buyers and sellers. We all know that sellers who unjustly refuse to release large deposits seriously handicapping buyers who have legitimately walked away from an agreement of sale and seek to buy another property. At the same time, however, sellers who are not holding deposits, or who are holding small deposits, find themselves at risk from buyers who terminate, especially when the deposit is deemed to be a liquidated damage.
Buyer and sellers need to know how deposits work when committing themselves to an agreement.