Usually, when a deposit is paid under a Contract for Sale of Land, the deposit is held by either the Vendor’s agent or solicitor in their trust account. Where the deposit is held by the agent, the deposit is usually invested in an interest bearing account, with any interest earned shared equally between the parties.
It is not uncommon or unheard of however, when purchasing a property for the Vendor to require the release of your deposit to them prior to settlement. In most cases the purpose of the release is to assist the Vendor in paying a deposit or stamp duty on a purchase that they have made.
From a vendor’s perspective, this is a practical and necessary request. Purchaser’s may however, be reluctant to release their deposit as there is further assurance in their money being held in trust in the event the matter does not proceed to settlement for any reason.
The Contract for Sale of Land does contain provisions which provide that should the Purchaser release all or part of a deposit paid prior to completion, then the Vendor grants a charge to the Purchase over the land, effectively securing the monies released. Such a charge may give rise to a right to lodge a caveat over the land as further security for the deposit monies released. Such a charge and caveat however, would be subject to existing charges (including any mortgages registered on title).
So, while a Purchaser may have some comfort in knowing that some security has been granted for the monies released, their rights of recovery may be limited by the rights of those who have previously registered any charge (including mortgages) on the title. Practically, this means that there may simply be no money remaining for the Purchaser after all other debts are satisfied including to any mortgagees.
The other inherent difficulty is that while a caveat may be lodge against the property, this does not in and of itself compel the Vendor to repay the deposit to the Purchaser. In fact, the Purchaser will in most cased need to commence proceedings against the Vendor to seek to recover the deposit monies. It goes without saying that this can be an expensive and protracted exercise.
Ultimately, on a commercial level, sometimes it is simply critical that a deposit is released early so that a vendor can purchase another property before selling his/her own, but perhaps to limit any purchaser’s risk, make the deposit available only at settlement, or alternatively undertake due diligence to determine what other charges may exist on title to assess whether a purchaser is likely to be refunded their money in the event of default.