What happens to your deposit if the home sale falls through?

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It depends on which party is responsible. It’s every home buyer’s worst nightmare. You find your dream home; your offer is accepted; and you pay a deposit—only for the sale to fall through before the property is transferred into your name. The question now is, where does this leave your hard-earned deposit?

The answer depends on the terms of the purchase agreement, and the reasons for cancellation. It is also largely dependent on which party is responsible for the sale falling through.

If you, the buyer, are in breach of contract, and the breach cannot be rectified within a stipulated time frame, you could lose your deposit. The seller has the right to use the deposit to cover any damages—such as legal costs or agent’s commission—that have been incurred as a result of the transaction falling through.

A variety of factors may be considered a breach of contract under property law, with the most common one being a homebuyer backing out after signing an Offer to Purchase (OTP).

 

What constitutes a buyer’s breach of contract?

While the sale of land in South Africa is governed by the Alienation of Land Act and must be in writing, the buying of a home is most importantly a contract.

The contract needs to list all conditions of the sale that are important to you so that there is no room for uncertainty.  That can range from when occupation takes place and whether there is occupational rent or not, to whether the pool pump works or the retractable washing line stays.

The OTP or Sales Agreement usually also includes ‘suspensive conditions’—certain conditions that must be met in order for the contract to be enforced.  The most usual one is whether you will need a home loan approved to secure the finance for the purchase.

Once the OTP or Sales Agreement is signed by all parties involved in the property transfer, it is considered binding, and both the buyer and the seller are obligated to fulfil their parts of the transaction.

This means that if the buyer pulls out after signing, they may incur significant penalties, including the loss of their deposit.  However, if the reason for the sale failing through is due to any of the suspensive conditions not being met, the contract falls away, and they will get their deposit back.

Examples of suspensive conditions can include the requirement for a buyer to conduct a home inspection in a timely manner and be satisfied with the outcome—for example, checking the roof structure.

However, the most common suspensive conditions are the requirement for the buyer’s financing (home loan) to be approved, and the requirement that the buyer’s current property be sold first.  This is known as a ‘subject to’ sale.

Buyers are strongly recommended to consult with a lawyer when including suspensive conditions, as these are there to protect the buyer to make sure they are ready to fully commit.  Having those suspensive conditions in place can protect your deposit.

The last scenario is the seller breaching the contract—for example, breaching a warranty.  Cancellation might not be the only remedy for the home buyer.  However, if the home buyer is able to cancel because the seller breached the agreement, the home buyer will be entitled to their deposit back.

Your deposit is safe should the seller not fulfil their obligations.

 

Other reasons why a sale may fall through

The specific reasons for a sale falling through can vary, and these circumstances determine what happens to the deposit.

Instances where the buyer can forfeit the deposit if the sale falls through include:

When a buyer deliberately withdraws their home loan application:  Regardless of whether the home loan is approved or not, withdrawing an application is a breach of contract if a home loan is needed to finance the purchase.

Buyer’s remorse:  A buyer may get cold feet and choose to pull out after signing, without a legally permissible reason.

No attempt to meet suspensive conditions:  While suspensive conditions are intended to protect the buyer, they will forfeit their deposit if no attempt is made to meet them.  For example, if the purchase is contingent on a buyer’s home selling, they must prove that they have made efforts to market it.

 

Instances, where the deposit is refunded to the homebuyer, should the sale fall through:

Failure to secure funding:  If the OTP is contingent on securing funding and their home loan application is denied for whatever reason, the deposit will be refunded.

Breach of contract by the seller:  If the seller breaches the contract and the buyer cancels as a result of such breach, the buyer is entitled to their full deposit back.

Title deed and legal issues:  If the transaction fails due to outstanding payments owed by the seller, or title deed disputes surrounding the property, the seller is in breach and the buyer will have their deposit returned.

 

Guaranteeing the safety of your deposit

While the vast majority of home sales are successful, it’s important to remember that there is always some risk that a sale may fall through.  Both buyers and sellers should be aware of this possibility when entering into a property transaction.

The deposit—which is held by a conveyancing attorney, estate agent, or secure platform like Buyers Trust—is meant to serve as a show of the buyer’s commitment to the home purchase, and an assurance to the seller that the buyer will honour the agreement of the OTP.

Should the sale fail and the buyer is not at fault (for example, a condition precedent isn’t met), the buyer needs to be 100% assured that the deposit will come back straight to them, together with interest for the time it was invested.

WRITTEN BY Jackie Smith

Jackie Smith is the head of Buyers Trust.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&O

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