Did you know that a deposit paid to purchase property could be released early before settlement? Usually you will hear the term Section 27 used by real estate agents and conveyancers. It allows for the vendor, in certain circumstances, to get early access to the deposit monies before settlement.
WHY IS A DEPOSIT REQUIRED?
Deposit funds are a common necessity to secure your property purchase. When purchasing real estate, a purchaser is commonly required to pay the deposit upfront. A deposit is a proportion of the contract price, can be negotiated with the vendor and is usually ten percent (10%) of the purchase price. The deposit money can either be paid as a lump sum or in installments depending on your negotiation with the vendor or their estate agent.
You may encounter a problem when it comes to the release of the deposit funds. Therefore, it is important to know of your rights to simplify this process and have a successful outcome without any settlement delays or additional legal expenses.
HOW IS A DEPOSIT HELD AND BY WHOM?
Standard practice is for the deposit funds to be retained in the real estate agent’s trust account. In certain circumstances the vendor’s legal practitioner or conveyancer may also hold the deposit in their trust account. According to section 24 of the Sale of Land Act 1962 (Vic) , the professional who holds this amount on trust is regarded as a stakeholder to the transaction.
Generally, these funds are held on trust and released to the vendor on settlement day. Many individuals are unaware that a deposit can be released earlier in certain circumstances. Sometimes your real estate agent may discuss this option with you but it is recommended that you seek legal advise to avoid any further complications.
The Section 27 Statement – early release of deposit authority
A vendor can gain access to their entire deposit before settlement date. This option is known by many in the legal industry as “Section 27 deposit release statement” and provided by Section 27 of the Sale of Land Act 1962 (Vic).
COMMON REASONS TO HAVE THE DEPOSIT RELEASED
Before we discuss the procedure for a Section 27 deposit release, let’s consider common reasons why vendors seek out this early release option:
- Some vendors may need the deposit funds prior to settlement to make a payment towards their existing mortgage, towards their deposit for another property purchase, an investment or for the payment of other financial commitments.
- Sometimes the selling real estate agent prefers their clients to have early access to the deposit so they can also be paid their commission.
- There may be other grounds for this release, such as the vendor preferring the funds in their own pockets and not a third party’s trust account.
REQUIREMENTS OF SECTION 27
Section 27 of the Act sets out the procedure to have the deposit released. Any consent to release must be in writing. This means that a verbal agreement is not sufficient for an early release. The vendor’s legal representative drafts a Section 27 statement in accordance with the legislation and seeks the purchases consent to this statement.
The legislation requires the vendor to disclose particulars of any mortgages and caveat registered over the property. Since the purchaser’s legal representative will often object to a Section 27, a letter from the bank will usually be required to confirm Section 27 particulars and satisfy these objections. Most banks in Victoria take 1-2 weeks after receiving a discharge request to complete the required letter, and some banks will not be forthcoming with the vendor’s requests.
Matters are generally less complicated if there is no mortgage registered on the property or there are no further claims against the property by third parties.
It is generally not advisable to agree to an early release if the vendor’s existing mortgage or loan amount is a sum that is more than eighty percent (80%) of the purchase price, a sum greater than the purchase price or if there is a caveat over the property and a third party is making a claim against the property.
If there aren’t sufficient funds to pay of the mortgage and the vendor’s bank delays settlement the purchaser will not be able to accept title and take ownership of the property. In this instance, if the vendor has obtained the early release of the purchaser’s deposit, and the vendor is unable to effect settlement, it may be difficult for the purchaser to recover their deposit monies from the vendor.
WHO PREPARES THE EARLY RELEASE OF DEPOSIT STATEMENT?
The vendor or their legal representative draft the statement for an early release of deposit and serve this written request on the purchaser’s conveyancer or their legal representative. The documents must be prepared in good faith and truthfully. There are severe penalties where the vendor knowingly or recklessly supplies false information to the purchaser about the particulars required to be given under Section 27 of the Act.
Section 27 provides that an offence for these situations may be a penalty of up to fifty (50) penalty points. The purchaser shall also be entitled to rescind the contract of sale and recover their deposit money monies where there is a breach of Section 27 of the Act.
TO ACCEPT AN EARLY RELEASE
According to Section 27 of the Act, the purchaser can consent to an early deposit release if they are satisfied with the particulars provided by the vendor and there are sufficient funds to discharge all mortgages and encumbrances over the property.
Both the vendor and purchaser must agree by signing the Early Release Deposit Authority , giving the conveyancer, agent or lawyer permission to release the funds. Any such consent should occur within twenty-eight (28) days of receiving the request for an early release. Usually the deposit is released soon after the purchaser’s acceptance of the statement.
CAN I DECLINE THE REQUEST?
Yes! A purchaser is not obligated to agree provided that they have a valid reason for their objection. The Act provides that a purchaser has twenty-eight (28) days from receiving the written notice to inform them that they are not satisfied with this arrangement and they must give valid reasons for their decision.
Purchasers often feel that as they haven’t yet got their end of the bargain – the property, the deposit should be held by a third party as is, and the Purchaser objects (blocks) the release. For this reason we always advise vendors under no circumstances should they rely on the deposit monies.
Below are some of the main reasons the purchaser can object:
- The property is an off the plan purchase;
- The contract is unconditional – purchaser has already accepted title;
- The mortgage amount secured against the property is more than 80 percent of the sale price in the contract; and
- There is a caveat on the property.
WHAT HAPPENS IF I DON’T RESPOND TO THE VENDOR’S SECTION 27 STATEMENT?
There are legal implications if the purchaser fails to notify the vendor or their representative of their decision before the twenty-eight (28) day deadline.
In this situation, it is deemed that the purchaser is satisfied with the early release of the deposit and the deposit would be automatically released as if the purchaser had accepted this arrangement. It is advisable that you respond to the other side to avoid this situation.
It is important to seek legal advice to avoid any unnecessary costs. Our dedicated property lawyers will be happy to assist you in making an educated decision about your property sale or purchase. We can identify any other ground that you can use to object to a early deposit release. Please call our property and conveyancing team on (03) 8590 8370 today for all your deposit enquiries or other property matters.
This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.
Last updated: 8 June 2022 Article by: Jennifer El-Asmar Edited by: Halil Gokler