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Jun24

Deposit Bonds

Amanda Quin - Wednesday, December 04, 2019

Blog authored by Amanda Quin

What is a Deposit Bond?

A Deposit Bond is a document which a lender or an insurer or other entity issues which states that the issuer will guarantee the payment of the cash deposit in respect of a contract for sale of a property and will pay the deposit, if called on to do so. There may be other terms and conditions or restrictions noted in the Deposit Bond. For example many Deposit Bonds have an expiry date and will require the original Deposit Bond to be provided to the issuer prior to that expiry date in order for a claim to be made.

Is there a fee for a Deposit Bond to be issued?

Generally a Deposit Bond issuer will charge a fee to provide the Deposit Bond. A full credit application is also usually required to be made by the Purchaser.

When are Deposit Bonds used?

A Purchaser of a property may wish to provide a Deposit Bond if they do not have sufficient money at hand to pay a cash deposit. This may be because they have other investments that they do not wish to liquidate or perhaps because they are borrowing the full purchase price.

Does a Vendor have to accept a Deposit Bond?

A Vendor can refuse to accept a Deposit Bond and may instead insist on a cash deposit being paid.

However if the Purchaser does not have the money available to pay a cash deposit, then this may mean that the sale does not proceed.

Are there any risks if a Vendor accepts a Deposit Bond instead of a cash deposit?

Yes there are some risks including:

(a) That the Deposit Bond may be fraudulent. (NB this risk can be reduced by your legal practitioner or conveyancer checking the authenticity of the Deposit Bond directly with the issuer prior to exchanging contracts); and

(b) Although it has not happened often, there have been instances where a Deposit Bond issuer has been placed into administration/liquidation - which effectively makes the guarantee worthless. NB In such a case, the Purchaser does still remain liable to themselves pay the Deposit and to complete the Contract and in most cases, the Purchaser will proceed to settlement and the deposit will be paid on settlement.

However, there is a risk that if both the Deposit Bond issuer and the Purchaser are unable to pay the deposit, then the Contract will not complete and the deposit will not have been paid. Court action could still be taken against the Purchaser to recover the deposit - but that would only be practically viable if the Purchaser has financial resources to meet any judgement that may be handed down.

A prudent Vendor may need to carefully consider the reliability of the Deposit Bond issuer prior to deciding whether or not to accept a Deposit Bond instead of a cash deposit.