Timing issues with deposit bonds and Contracts of Sale of Land

In some conveyancing transactions, the parties agree that the purchaser will provide a deposit bond to the vendor instead of a cash deposit. If a deposit bond is used, solicitors need to understand some of the key timing risks associated with deposit bonds and what steps they can take to minimise those risks.

This article assumes that solicitors are using the current version of the Real Estate Institute of Victoria / Law Institute of Victoria Contract of Sale of Land (‘LIV Contract’). Care should be taken if a different form of contract has been used.

General condition 15.2 of the LIV Contract defines a deposit bond as an “irrevocable undertaking to pay on demand an amount equal to the deposit or any unpaid part of the deposit.”

In practical terms, the purchaser pays a fee to a third-party organisation (‘Deposit Bond Provider’) who agrees in writing to pay a sum of money (‘Deposit Bond Amount’) to the vendor, if certain conditions are met (‘the deposit bond’).

The trigger for the payment of the Deposit Bond Amount to the vendor generally occurs if the purchaser defaults on the contract or the vendor is otherwise entitled to retain the deposit (see general condition 15.6 of the LIV Contract).

In contrast to a cash deposit, which is typically held in a solicitor’s or real estate agent’s trust account, a deposit bond is not a liquid asset and is subject to various terms and conditions. Solicitors and clients therefore need to be aware that, unlike a cash deposit, a deposit bond can expire and be invalid when called upon by the vendor. Once expired, the vendor has no recourse to the deposit bond and will not be paid the Deposit Bond Amount.

General condition 15.2 of the LIV Contract requires that a ‘deposit bond must have an expiry date at least 45 days after the due date for settlement’. This is because if a deposit bond is to be relied upon by the vendor:

• the deposit bond needs to be valid after the expiry of an unremedied rescission notice (typically a 14-day notice period for a rescission notice), and
• the deposit bond expiry date must also allow sufficient time for the vendor to provide the Deposit Bond Provider with the required notice of the termination of the contract of sale.

Solicitors may be exposed to claims where the deposit bond could not be relied upon by the vendor because:

• the solicitor did not identify that the deposit bond expiry date was insufficient from the outset (for example, the deposit bond was always going to expire before the vendor was entitled to terminate the contract of sale), or
• the solicitor did not turn their mind to the consequences of any delay to settlement or an extension to the settlement date on the vendor’s ability to call upon the deposit bond (for example, the deposit bond expired before the new settlement date).

Dealing with deposit bonds at the start of a conveyancing matter

If the parties agree to use a deposit bond, solicitors acting for vendors should:

• obtain a copy of the deposit bond and review its terms and conditions to ensure that the deposit bond complies with general condition 15 of the LIV Contract. In particular, the deposit bond expiry date should be ‘at least 45 days after the due date for settlement’.
• advise the vendor and confirm in writing if the deposit bond provided by the purchaser does not comply with general condition 15 of the LIV Contract and draw the vendor’s attention to the potential consequences of a defective deposit bond.
• diarise and monitor the expiry date of the deposit bond against the settlement date (and take into account any potential delay to settlement) to ensure that the deposit bond is valid, if required to be called upon by the vendor.

Beware of the risks of an extension of the settlement date

Solicitors acting for vendors also face further risks when an extension to the settlement date is requested by either the vendor or the purchaser. Accordingly, it is recommended that:

• If any party seeks to extend the settlement date, solicitors acting for the vendor first need to consider whether the expiry date of the existing deposit bond is sufficient.
• If the expiry date is not sufficient, solicitors should advise the vendor and confirm in writing the consequences if the contract of sale is subsequently terminated after the extended settlement date. I.e. the existing deposit bond might be invalid and worthless if called upon by the vendor after the extended settlement date.

Finally, if the vendor is entitled to call upon the deposit bond, solicitors acting for the vendor must ensure that any notice to the Deposit Bond Provider requiring payment of the Deposit Bond Amount complies with the terms and conditions of the deposit bond, and is provided before the deposit bond expiry date.

For further information on deposit bonds, solicitors can refer to textbook commentary by David P Lloyd and William F Rimmer, Victorian Land Contracts (published by Thomson Reuters).