September 2008

Late payment of balance deposits - how much of a problem?

Version 6 of the REIQ house/land sale contract specifies the "initial deposit" must be paid "when the buyer signs this contract". Version 2 of the commercial land/buildings contract requires the buyer to pay the deposit "upon the formation of this contract" which in most cases means the time the last person required to sign a contract puts pen to paper.

Both contracts state that the failure to pay a deposit as required puts the buyer in default and allows a seller to terminate.

What if the buyer pays the deposit (or part of it) late, as commonly occurs in practice?

Best practice from a buyer's point of view is of course to obtain the seller's agreement prior to the due date that the date for payment of the deposit or the balance of it, is extended.

If such agreement is not obtained, late payment will still be no problem if the seller subsequently agrees to accept the lateness of payment. A retrospective agreement to vary the contract in this way is adequate to protect the buyer's interests.

But what if nothing is said or agreed about the lateness of the payment?

Theoretically, in such circumstances the seller still has the right to terminate much later in the day, even just prior to settlement. This is obviously a very undesirable situation for a buyer to be placed in.

In practice the seller's ongoing right to terminate can most likely only be preserved if the seller specifically "reserves its rights". If the seller continues to proceed with steps towards settlement of the contract knowing of the lateness of payment without specifically reserving the right to terminate, they probably waive the termination right by their conduct.

If the seller has no knowledge whether or not the deposit has been paid on time the right to terminate can probably be exercised any time up to settlement if in fact the deposit has been paid late.

Follow these best practice tips to avoid potential problems associated with late deposit payments:

  • late payment of any part of the deposit should be accommodated in a special condition. This includes the initial deposit which otherwise has to be paid "when the buyer signs this contract" (residential) or on "formation of this contract" (commercial). See our Qld Conveyancing Clause Library for an appropriate special condition;
  • if, after a contract is signed it appears that a deposit payment is going to be late, an extension should be negotiated before the due date;
  • if an extension to the date is not obtained before payment, it should be negotiated when the payment is made or promptly after payment;
  • agents should notify the seller immediately of any late payment so as not to expose a buyer of the risk of an uninformed seller being entitled to terminate just prior to settlement. At the same time agents should notify the buyer's solicitor to give the solicitor an opportunity to remedy the problem.

Should you have any queries regarding any conveyancing or PAMDA issues call 1300 LAW LAW (1300 529 529).

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