by Nadia Herlambang

Confused about deposits? Let NZ Legal’s Property Law Specialists explain it to you!

A deposit in a Sale and Purchase Agreement (SPA) is the first instalment you as the purchaser pay to the vendor (seller). It is a part-payment of the purchase price and shows the vendor your commitment to the purchase.

The ADLS/REINZ SPA (which is the most common form of SPA in NZ), contains a standard, legally binding clause explaining how the deposit will be handled.  

The default position under the ADLS/REINZ SPA is that a deposit is payable on signing of the SPA.

However, if you’re buying a property on a conditional agreement, it’s best to have your lawyer negotiate and draft the SPA, so the deposit becomes payable only once the conditions are satisfied, rather than under the default terms.

How Much is the Deposit Usually?

The deposit is typically 10% of the agreed purchase price.

• Example: If the purchase price is $900,000, the deposit will be $90,000.

You should ensure the deposit amount you’ve agreed to pay the vendor in the SPA doesn’t exceed the funds you have available.

If you do not have the standard 10%, vendors often will agree to:

• A 5% deposit
• A specified alternative amount

‍Who Holds the Deposit and Where is it Paid?

The SPA will specify who holds the deposit. Most often it’s:

• The real estate agent’s trust account
• An independent service such as NZ Real Estate Trust

In a private sale, the buyer’s deposit is held in:

• The vendor’s lawyer’s trust account

Using KiwiSaver as a Deposit

If the purchase involves using your KiwiSaver funds for the deposit, additional requirements need to be covered off so that your KiwiSaver funds are not placed in jeopardy. Your solicitor should insert a specific clause into the Sale and Purchase Agreement confirming that you will be using KiwiSaver funds for the deposit and outlining how those funds will be held and applied. This protects the transaction and ensures the funds remain compliant with KiwiSaver rules.

Below is the standard clause we use for purchasers relying on KiwiSaver for their deposit:

21.0 Deposit - KiwiSaver Funds

A deposit of 10% of the purchase price is payable upon this agreement becoming unconditional. The parties agree that the purchaser is using KiwiSaver funds for payment of the deposit and agree that the deposit shall be held in the Vendor’s solicitor’s trust account as stakeholder pending completion of settlement. Prior to payment of the deposit, the Vendor’s solicitor shall provide an undertaking to the Purchaser’s solicitor confirming that in the event that settlement is not completed by the due date in the Agreement or any agreed extended date (except where non-completion of the settlement date is due to the purchaser’s default) the deposit will be immediately refunded to the purchaser’s solicitor trust account.

Be aware that most KiwiSaver providers take between 8-15 working days to process withdrawal applications.

What Happens if the Vendor Cannot Access the Deposit Due to KiwiSaver?

Where KiwiSaver funds are used for the deposit, the vendor cannot access the deposit until the settlement date. If the vendor requires those funds for a deposit payment themselves (e.g. if they are purchasing a house contemporaneously as they sell their current home) the vendor may need to make alternative arrangements – for example arranging bridging finance.

Bridging finance is a bank lending scheme to help you buy a house before you’ve sold your current one. Bridging finance is typically available for up to 12 months.

There are two types of bridging finance:

• Closed bridging finance: The sale of the current and new property is unconditional. The bridging finance is for covering the time between the two settlement dates.
• Open bridging finance: When you want to buy another property without your current property being sold. Your mortgage advisor can help you structure your lending with the bank until the property is sold or for the next six months, whichever is earlier. A common term is some or all the lending being on interest-only terms.

Bridging finance includes the bank’s floating rate, plus a premium interest rate. As bridging finance can be for an uncertain period, the bank needs to be confident that you can repay the loan.

Period the Deposit Must Be Held and Potential for Early Deposit Release

Deposits are regulated by the Real Estate Agents Act, particularly Section 123 which states that a real estate agent who receives funds relating to a transaction must hold the funds for 10-working days from when they received it.

The 10-working day period allows for the buyer or vendor to raise any requisitions or disputes they have. Some common ones being an unregistered easement or covenant.

The 10-working day requirement can only be reduced if both involved parties, purchaser and vendor, mutually agree in writing.

Normally, deposits must be held for the 10-working days, however, in some rare cases, the settlement day will be within this period. If this happens, you should engage a lawyer to insert an appropriate condition in the SPA permitting an early deposit release once both parties have agreed.

If the vendor can’t or won’t remove a title issue (requisition), the purchaser can get their deposit back immediately.

Why Vendors Request Early Release of Deposits

A vendor may request an early deposit release to fund the deposit on their next property. We must note there are some risks with an early deposit release, including:

• The purchaser losing leverage if issues arise before settlement,
• Difficulty recovering the deposit if the vendor defaults, and
• The vendor not having the entire amount to refund the purchaser if they cancel for a legitimate reason (as the real estate agent’s typically deduct their commission first).

Consequences of Deposit Non-Payment or Default

As the purchaser, missing your deposit payment or defaulting on the SPA can lead to serious consequences. These consequences are outlined in clause 2.2 of the SPA.

If the deposit is not paid by the payment due date:

• The vendor can issue a Notice of Default on the purchaser requiring payment.
• The purchaser has three working days to remedy the breach.
• The vendor can cancel the agreement and retain any part deposit paid (up to 10% of the purchase price) and claim damages for any loss.

‍Key Takeaways

Ultimately, deposits are crucial to purchasing a property. You should keep these in mind when discussing your deposit with your lawyer or real estate agent:

• Ensure your deposit is paid on time, as missing the deadline can lead to significant consequences
• The deposit is usually 10% of the purchase price
• The deposit will be held in the trust account of the real estate agent or vendor’s lawyer
• The deposit must be held for 10 working days unless both parties consent to an early release
• A clause should be added to the SPA if you are using KiwiSaver for the deposit
• If you’re the vendor and can’t access the deposit, you may consider bridging finance

If you are buying or selling and need advice on structuring a deposit payment, contact NZ Legal today through the form below for specialised property advice.

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