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Deposit Bond FAQSometimes a purchaser does not have the ready cash to be able to pay a 10% deposit on the purchase of a property. This can result in both the purchaser and the vendor missing out on a sale. The deposit bond is an alternative to a cash deposit. Lawyers, conveyancers, estate agents and consumers are often confused about the merits of the deposit bond. If used properly, and in accordance its terms and conditions, a deposit bond be of benefit to all parties involved in a real estate transaction. However, it is important to know the limitations and rules associated with the use of the deposit bond. In this article, subject to our disclaimer, we identify some of the benefits and problems associated with deposit bonds, and set out some strategies for ensuring that those who rely on a deposit bond do not expose themselves to unacceptable risk.
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STAY SAFE...  What is a Deposit Bond?Basically, a deposit bond is an insurance policy. The deposit bond is the policy document that tells the vendor that the insurance company will pay the 10% deposit to the vendor in any of the circumstances where the deposit would ordinarily be forfeited by the vendor.No money actually changes hands under the deposit bond. Instead, all purchase funds are paid at settlement. In the ordinary course of events settlement takes place, the purchase price is paid in full, and the deposit bond simply lapses.
STAY SAFE... Why use a Deposit Bond?There are numerous benefits in using a deposit bond, including:
STAY SAFE... Are there any problems with Deposit Bonds?There’s always a negative side; and deposit bonds have their own problems:
STAY SAFE... Does a vendor have to accept a deposit bond?We have seen deposit bonds cause a great deal of trouble where their use has been unexpected. This is because a deposit bond is NOT recognised as a true deposit.Where a contract of sale states that a deposit is to be paid, the deposit must actually be paid. If we recall (see above) that a deposit bond is really no more than an insurance policy, issued on the basis that the full purchase price will be paid at settlement, we can see that the deposit bond is a “just in case” measure as far as the vendor is concerned. If the vendor is relying on early release of the deposit from a sale in order to fund the payment of a cash deposit on a purchase, problems can arise if the vendor is “taken by surprise” with the delivery of a deposit bond in place of a cheque for a cash deposit. The vendor is entitled to demand that the terms of the contract be honoured, and may allege breach of the contract if the purchaser uses a deposit bond. But this is just the start of the problem for both parties. If the vendor insists upon the purchaser replacing the deposit bond with a cash deposit, the purchaser will be forced to incur additional costs: first for the wasted deposit bond, and then for the cost of producing the cash required; the latter often involving costly bridging finance. Having been forced to incur costs and suffer inconvenience, the purchaser is unlikely to consent to the early release of the cash deposit to the vendor, thereby ruining the vendor’s plans. The two parties end up at loggerheads, with both suffering unnecessarily. The lesson that comes out of this is that a purchaser using a deposit bond should always seek the vendor’s agreement beforehand. (See our "Consumer Alert" about this on The Real Estate Blog).
STAY SAFE... Does the Deposit Bond cover the purchaser?We have mentioned that the deposit bond is a form of insurance policy, but it is for the vendor’s benefit only. If the insurer is required to pay the vendor pursuant to the deposit bond, the insurer will then look to the purchaser for recovery of the amount paid. It is important to remember that the purchaser remains responsible for completion of the contract, including the payment of any costs and penalties associated with a default. The deposit bond is simply a means by which the vendor can be assured that a sale to the purchaser with the deposit bond is safe.
STAY SAFE... Who can use a Deposit Bond?The deposit bond can be used in a variety of situations. The most common use of deposit bonds are where:
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What types of Deposit Bond are available? The most common types of deposit bond are as follows:
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