Deposit Bonds

Typically, a purchaser under a contract of sale will make payment of a deposit to the vendor’s agent or legal representative. The deposit can be paid in part of in full by a date specified in the contract of sale.

That deposit is often paid by electronic funds transfer or bank cheque. However, in some circumstances, a purchaser may use a deposit bond instead of paying the cash deposit upfront.

What Is a Deposit Bond?

A deposit bond guarantees the purchaser’s obligation to pay the deposit under a contract of sale.

Rather than the purchaser paying the deposit in cash, the deposit bond is provided to the vendor as security. If the purchaser defaults and the vendor becomes entitled to keep the deposit, the vendor may call in the bond. The issuer of the bond may then seek reimbursement from the purchaser.

A deposit bond functions as a substitute for a cash deposit. It does not remove the purchaser’s obligation to pay the deposit; it merely confirms that the deposit needs to be paid in cash.  

When Can Deposit Bonds Be Used?

Deposit bonds are widely used across various types of property transactions, including residential, off-the-plan, commercial, situations where buyers are waiting on sale proceeds, and transactions involving simultaneous settlements. However it is important to note that a deposit bond can only be used if the contract states that it can be used.  Therefore, you should check the conditions in the Contract to ensure that a deposit bond can be used or ask for our advice as to the insertion of a special condition to that effect.

When Can a Deposit Bond Not Be Used?

A deposit bond cannot be used in every transaction. A vendor may refuse a deposit bond if the bond issuer is not acceptable, the expiry date is too short, or the wording does not comply with the contract, or more commonly when the vendor intends to call for on early release of the deposit. It may also be rejected if the transaction is considered high risk, the vendor needs access to the deposit before settlement, the purchaser is buying at auction without prior approval, or if the vendor’s mortgagee, developer, or solicitor objects to its use.

Advantages of Deposit Bonds

Deposit bonds offer several advantages, including preserving cash flow, avoiding the need to liquidate assets, useful for off-the-plan purchases where the deposit cannot be released and can help facilitate bridging transactions, while also often being quicker to arrange than short-term finance options.

Disadvantages of Deposit Bonds

Deposit bonds also have some disadvantages, including that the vendor’s acceptance is not guaranteed, they involve a cost to the purchaser, issues can arise with expiry dates, and they may not meet the vendor’s commercial needs.

Conclusion

Deposit bonds can be a valuable tool in property transactions, particularly where a purchaser has the financial capacity to complete but does not have immediate access to cash for the deposit. However, deposit bonds are not automatically accepted and must be permitted by the contract or agreed by the vendor. They also involve costs, expiry dates, and continuing liability for the purchaser. If you require assistance with your sale or purchase, please contact our office on 03 9707 1155.