I am a vendor and a purchaser is asking me to accept a 5% deposit, what should I do?

It is common practice for vendors to agree to a ten per cent deposit ‘paid by instalments’, with five per cent paid on exchange and the remaining five percent paid on settlement. This practice was considered in Boyarsky v Taylor [2008] NSWSC 1415.

In this case, the purchaser, Taylor, paid a five per cent deposit on exchange. The contract between the two parties contained a special condition stating that the balance of five per cent could be paid on completion. Taylor defaulted on completion of the contract and therefore the vendor, Boyarsky, sought recovery of the owing five per cent. Brereton J refused to order that Taylor pay the five per cent as it was ‘void as a penalty’.

Brereton J in his judgment followed the authority of Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40 where Bryson JA concluded that provisions requiring a five per cent deposit to be topped up to ten per cent were void. Brereton J also considered the case of Iannello v Sharpe [2007] NSWCA 61 where Hodgson JA did not order payment of the further five per cent.

Brereton J did not uphold the view that the present case could be distinguished from Luu and Iannello as the second five per cent is not a ‘genuine pre-estimate of damages’.

This case demonstrates that if a purchaser fails to complete a contract and they have only paid the agreed initial five per cent, a vendor cannot seek compensation for the owing five per cent.

Therefore, before accepting a five per cent deposit, a vendor should be aware that this will be the maximum amount that the purchaser with forfeit on default.