Russell Cocks, a leading property lawyer in Victoria and author of numerous articles relating to property law, wrote a comprehensive article on the early release of deposits under Section 27 of the Sale of Land Act 1962 titled “Deposit Release – Why Take the Risk?“. Mr Cocks’ conclusions and warnings, together with those of other leading industry commentators, have informed our policy of automatically objecting to the early release of deposit, and our advice to purchaser clients that they should NOT sign a Section 27 Deposit Release Statement.
What is the Section 27 Deposit Release Statement?
Victoria is one of the few jurisdictions where vendors have a procedure by which the deposit paid on a real estate sale can be released prior to settlement. As most conveyancing practitioners are aware, the procedure is cumbersome, time-consuming and the cause of much frustration for legal representatives and clients alike. This is particularly so if a vendor has gone to the trouble of sourcing the information required in a Section 27 Deposit Release Statement, obtaining a confirmation letter from their lender, and following up with their legal representative and the real estate agent over a period of weeks or months.
For our vendor clients we have provided information on the early release of deposit pursuant to Section 27 of the Sale of Land Act 1962, but this information also comes with the warning that a purchaser’s legal representative is more likely than not to follow the warning offered by Mr Cocks. Examples of the information we provide to vendor clients can be found at the following pages:
The quest for early release of the deposit is invariably driven by the vendor’s real estate agent, as estate agents are entitled to deduct their commission from the deposit before delivering it to the vendor. Early release of the deposit means an early payday for the estate agent.
Why estate agents tend to drive the Section 27 Deposit Release process
As one would expect, a real estate agent who is keen to get hold of the commission is likely to press hard for the deposit release procedure to be commenced, and then to monitor the progress of the Section 27 Deposit Release Statement as it passes through the hands of the various parties.
Some real estate agents misrepresent or trivialise the Section 27 procedure, raising hopes for the vendor and creating difficulties for legal representatives on both sides of the transaction. See the following example of advice provided by one leading real estate franchise to vendors:
Most estate agents handle deposits properly and in a professional manner, and they understand and observe the relevant legislation regarding the handling, transferring and release of deposits. However, the involvement of the estate agent sometimes goes beyond what may be appropriate. In some instances the estate agent will not only request that the vendor’s legal representative should immediately have the vendor provide a completed Section 27 Deposit Release Statement, the estate agent will also serve the document on the purchaser, and may even have the purchaser sign the release before there has been any opportunity for the purchaser to obtain legal advice.
It is also common experience that the estate agent will make direct contact with the purchaser and/or the purchaser’s legal representative, and badger one or both about allowing the deposit to be released.
We note that this drive to access the commission via the Section 27 Deposit Release process also seems to be the reason for a number of estate agents advising vendors against accepting deposit bonds in place of a cash deposit, or even inserting special conditions into contracts (some estate agents have a rubber stamp made specifically for this purpose) so as to prevent the use of a deposit bond. We have even seen situations where a vendor has been “encouraged” to accept a lesser offer with a cash deposit over a higher offer supported by a deposit bond.
Our policy on early release of the deposit under Section 27 of the Sale of Land Act 1962
Russell Cocks’ article “Deposit Release – Why Take the Risk?” concludes with this warning to lawyers and conveyancers who represent purchasers in real estate sale transactions,
“Consenting to release immediately upon sale would be outright dangerous, but consenting at any time prior to settlement would appear to expose a purchaser to an unnecessary risk. Failing to fully inform the purchaser of this risk would constitute professional negligence.”
Consequently, and in order to minimise risk to our purchase client, as well as limiting our own liability, our policy on the early release of deposit pursuant to Section 27 of the Sale of Land Act 1962 is as follows:
1. We automatically object, on behalf of every purchaser client, to the early release of the deposit.
Our first communication to a vendor or their legal representative contains a statement to the effect that the purchaser cannot be satisfied with the particulars supplied in support of the Section 27 Deposit Release Statement as at the day it is served. This is common practice in the industry, and it should come as no surprise to any practitioner representing a vendor that such an objection would be issued.
2. We advise the purchaser NOT to sign a Section 27 Deposit Release Statement.
It’s this part of the procedure that seems to cause difficulty for vendors and their representatives. The difficulty tends to arise because the estate agent may have told the vendor that the deposit is “automatically released after 28 days“, that the purchaser has “already agreed to release the deposit” or “your conveyancer will get the deposit released for you“. Alternatively, the vendor’s legal representative may have allowed the vendor to believe that the early release of deposit is a mere formality, often reinforced by having the vendor go to the trouble of completing the Section 27 Deposit Release Statement and obtaining a bank confirmation letter.
3. We do not badger our purchaser client on behalf of the vendor’s estate agent or the vendor’s legal representative.
Having formally objected to the release of the deposit, and having warned our client of the risks associated with early release of the deposit, it would be absurd for us to then attempt to encourage our client to release the deposit prior to settlement.
When an objection has been served, the 28 day provision at Section 27(4) and Section 27(7) is eliminated, leaving the purchaser’s signing of the Section 27 Deposit Release Statement as the only remaining option for release of the deposit; and of course, the purchaser is advised against signing the Section 27 Deposit Release Statement.
NOTE: The situation remains the same where a vendor holds clear title.
An alternative approach to early deposit release
As our policy is the result of an attempt to minimise risk, a vendor or stakeholder who seeks early release of the deposit may be prepared to transfer the risk from us and our client to themselves as alternative stakeholder.
This may be achieved in either of the following ways:
A. The vendor’s legal representative may arrange for the full deposit to be transferred from the estate agent to their own trust account.
This option allows the vendor’s legal representative to become the stakeholder, and to assume the risk associated with early release of the deposit where the purchaser has objected and the Section 27 Deposit Release Statement will not be signed.
B. The vendor’s legal representative may take steps to convince the current stakeholder to assume the risk of early release of the deposit.
It is the stakeholder who must make the final decision on the release of the deposit, and a stakeholder who releases the deposit without proper authority, or in circumstances that cause loss to one party or the other, may be liable to make good that loss. The vendor’s legal representative may advance legal arguments in favour of release, and the estate agent may then seek legal advice (from the estate agency’s own lawyer) on the role of statkeholder and the merits of the arguments in favour of release.
Our firm has no role in arguing for, or against, the appropriateness of early release of the deposit. Furthermore, the costs of obtaining professional legal advice in determining whether or not the deposit should be released in the circumstances remain with the person who seeks to benefit from the exercise – the vendor.
Both the risk and the benefit move to the vendor’s side of the transaction
As most legal practitioners will appreciate, there is no benefit whatsoever to the purchaser where a deposit is released early, but there are substantial risks. Requiring the purchaser or their legal representative to assess the risk associated with early release in the circumstances may be seen as unfair.
A vendor who is keen to have the deposit released might convince the stakeholder to assume the risks associated with early release of the deposit by confirming to the stakeholder that:
- there are no conditions enuring for the benefit of the purchaser;
- the purchaser has accepted title prior to release of the deposit; and
- the facts as set out in the case of McEwen v Theologedis  VSC 244 have application.
REMEMBER: It is not our policy to prevent the vendor from having access to the deposit. Rather, it is our policy that neither our client nor our firm should accept risk where there is no benefit in doing so.