Deposits and Prepayments

Deposits and PrepaymentsMany of us accept that it is common practice when purchasing goods at the retail level that in order to have the merchant request the goods from the supplier, they will require the customer to leave a deposit.

This in itself is acceptable to both the supplier and the consumer as we accept that the supplier does not want to have ordered goods on behalf of a customer who does not return to pay for and collect the goods.  The deposit acts as a kind of surety such that the customer will want to return to complete the purchase.

In most cases, the goods will be delivered to the merchant, the consumer will pay any remaining balance owing on the goods, collect them and the sale will be completed.

But what happens if you have left your deposit, or have part paid a lay-by, or worse still, paid in full but are yet to receive delivery for the goods and the retailer goes into liquidation.

In these cases the customer will be an unsecured creditor, and in most cases the customer will have lost whatever monies have been paid to the company up to the date of the liquidation.

In the case of many retail situations, if the customer has left a deposit or part paid a lay-by the customer will have lost a lesser sum of money. In some cases however, the customer may have been saving for a long time and has paid $1,500 in cash on an electrical item expecting their electrical appliance to have been delivered within a certain period of time and the appliance is never delivered and the company goes into liquidation. This customer will be an unsecured creditor in the liquidation of the company, and will rank equally with all other unsecured creditors. In many cases the customer in this example will have lost their $1,500.

Whether the consumer realises it or not, by paying for goods in advance, they are in effect lending money to the merchant company, which substantiates their position as a creditor of the company.

When seeking to pay a deposit or pay for the goods awaiting delivery, most people assume the business will honour the transaction and their goods will be delivered. As the consumer is advancing credit to the merchant company, they are never given the opportunity to explore the true position of the business, they just assume, as do most people, that the transaction will be completed with minimal fuss.

In light of the risk of each of the above scenarios, the following is a brief listing of ways to minimise such risks for deposits and prepayments:

  1. Do not pay anymore than the minimum sum for the deposit
  2. Minimise the amount of time goods are kept under lay-by
  3. If possible, only make a full payment at the time you are ready to collect the goods from the store. Do not pay full price on the basis that it will be ordered in, leave a minimum deposit instead
  4. Pay your deposit or payment by credit card.  In certain circumstances, if your goods are not delivered, the credit card provider will refund the purchase price/deposit to your credit card and they will seek to address the situation with the retailer.

The above demonstrates what happens in reference to a retail transaction, for which there may be some lesser sums involved, however, let’s now consider when a vendor sells an item of real estate.

It is commonly the practice that when selling an item of real estate that upon the execution of the contract for sale, a deposit of (usually) 10% is paid to the estate agent for which they should bank the funds into their trust account. Upon settlement of the sale, the estate agent will deduct any commissions payable to the agent and account for the balance to the vendor (assuming there are sufficient funds to pay the mortgagee and other settlement adjustments).

Take the example that the item of real estate is sold for $500,000 and a 10% deposit ($50,000) is being held by the agent. There are sufficient funds from the sale to discharge the mortgagee and settlement adjustments from the remainder of the purchase price. After the agent deducts their commission of 2.8% ($14,000), a balance of $36,000 should be returned to the vendor.

If the estate agent is placed into liquidation, and there are insufficient funds in the Trust Account to return the $36,000 to the vendor, the vendor in this instance will become an unsecured creditor in the liquidation. (It is accepted that the funds should have been held in trust and dealt with accordingly, but in this instance it is assumed that the Trust Account has not been administered correctly).

Now given that most people believe that the estate agent will honor their end of the agreement by returning and surplus funds to them as do most people in the retail scene as discussed above, the possibility of not receiving the surplus funds is not given a second thought. However, if the same person were looking to provide credit to someone for a similar level of funds, I can only imagine they would exercise far more caution and diligence prior to advancing such a significant level of funds.

The best way to seek to mitigate the risk associated with the above scenario is to stipulate under the contract for sale that the deposit is to be held by the vendor’s solicitor.

Therefore, under the above scenario, upon the exchange of contracts, the $50,000 will be held in the solicitors trust account until settlement, following which, the estate agent will be paid their commission for the sale and the surplus funds will be returned to the vendor.

In the event that the solicitor’s trust account is deficient, i.e., the $50,000 is no longer there to pay the estate agent’s commission and surplus funds to the vendor, the vendor can seek to lodge a claim under the Legal Practitioners Fidelity Fund via the Law Society of NSW[1].

As no such equivalent provisions are in place for Real Estate Agents Trust Accounts at this time, the fact that there is the possibility of a recovery from the Legal Practitioners Fidelity Fund in the event of a worst case scenario, provides a greater sense of comfort than is otherwise available by leaving the deposit within the real estate agent’s Trust Account

[1] Please refer to the Law Society of NSW in relation to the application of the Legal Practitioners Fidelity Fund