In property transactions a deposit is usually paid by the buyer on exchange of contracts and is used to demonstrate the buyer’s commitment to the transaction. In the event that the buyer does not complete its purchase the seller is usually able to keep the deposit and any interest accrued on it.
As a general rule a 10% deposit is considered reasonable in English law but the amount of deposit is usually a matter of negotiation between the parties to the transaction. Where the buyer is in a strong bargaining position it may be able to persuade the seller to accept a deposit of less than 10% however, the contract should provide for the deposit to be made up to 10% in the event that the buyer has failed to complete in accordance with the contractual timescale.
In situations where a deposit of more than 10% is paid then it may, depending on the circumstances of the transaction as a whole, be viewed as a penalty rather than a genuine deposit and the seller may be unable to retain it should the buyer fail to complete .
Agent v Stakeholder
Most property contracts will state that the seller’s solicitor will hold the deposit as stakeholder which means it will only be released to the seller in the event that completion takes place or on the buyer failing to complete.
The alternative to the deposit being held as stakeholder is that it be held by the seller’s solicitor as agent. In this situation the seller’s solicitor is able to pay the deposit to the seller immediately following exchange of contracts.
The risks of allowing the deposit to be held as agent are significant and it may be difficult for the buyer to recover any sums paid should the seller default on the contract. The risks of proceeding in this way were recently demonstrated in a decision of the High Court .
The case concerned a property transaction in which, against the advice of his solicitor, a buyer paid a 20% deposit which was to be held as agent by the seller’s solicitor. The deposit was immediately released to the seller following exchange of contracts but unfortunately for the buyer it transpired that the seller was already insolvent at the point the deposit was paid over to him. The transaction did not complete and the buyer was unable to recover the deposit paid.
The decision demonstrated the importance of buyers being fully advised of the risks in proceeding with the deposit held as agent and acts as a reminder that it should be avoided whenever possible. It is however a commercial decision for the buyer at the end of the day and it is up to the buyer to decide whether it wants to take that risk.
 Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd  UKPC 7
 Kandola v Mirza Solicitors LLP  EWCH 460 (Ch)