Should I Agree to a Section 27 Deposit Release?
One common question that arises from purchasers is whether or not you should agree to a Section 27 Deposit Release.
Here’s what you need to know…
What Is a section 27 – release of deposit?
When a purchaser buys a property, they usually pay a deposit upfront of 10% of the contract price. This secures the purchase, obligating the buyer to complete the sale and the vendor to not accept an offer from another party. The deposit is usually held by a real estate agent, lawyer or conveyancer until the settlement day. At settlement, the purchaser gives the vendor the balance of the sale price owed less the deposit paid. At this point, the deposit is released to the vendor, with any applicable fees subtracted, such as the costs of a real estate agent.
So, how does a Section 27 Release factor in? In short, it allows the vendor to have early access to the deposit funds. Both the vendor and purchaser must agree by signing the Early Release Deposit Authority, giving the conveyancer, agent or lawyer permission to release the funds.
What’s the Process?
It’s important to note that while Section 27 releases are common, it is not a guaranteed part of the sales process. There are times when it is recommended or simply an act of good will. For example, the vendor may need the funds to put down a deposit on another property. There are other times when a Section 27 is considered risky. Here’s how the process works.
– The vendor must make a written request for early release via the Section 27.
– The request must include details regarding money owed on the property, including mortgages and caveats.
– The purchaser can sign the Section 27, authorising the funds to be released.
– If the purchaser does not agree to early release, they must give a specific, written reason. The vendor will not have access to the funds until settlement.
– If the purchaser fails to respond to the request after 28 days, the funds can be released.
What happens if I agree and something goes wrong?
What if the sale falls through? What if a vendor has committed to another property, but the purchaser refuses to release the funds? An experienced lawyer or conveyancer can help both parties determine if signing a Section 27 is safe. Here are two tips to help you avoid common pitfalls.
TIP 1 – Get all the details. Carefully examine the vendor’s disclosure of mortgages and caveats so you can make an informed decision. How much is owed? Does the vendor need the deposit funds to satisfy all debts against the property? If so, letting them use the funds toward another purchase is not advisable for either party. A vendor who is in default on their mortgage should justify an immediate rejection of a Section 27 request. Vendors too need to understand the details. Are there contingencies in the sales contract that would allow the purchaser to get the deposit back if the sale does not go through? If so, how would the vendor repay the money if it is being used elsewhere?
TIP 2 – Don’t be pressured. Do not allow an eager real estate agent to pressure you into signing a Section 27 at contract signing. Agents prefer for funds to be released early because that means their commission is also released early. However, neither party should be expected to make a decision without having time to review all the details and even consult with their conveyancer or lawyer.
So, is it a good idea or not?
It really depends on the circumstances. If it is deemed safe by your lawyer or conveyancer, it’s a good idea to be accommodating. There are often many obstacles that arise before settlement. Extending a favour to the vendor may make them more likely to be accommodating with you, if the need arises. What if your bank delays settlement? A good relationship may prevent the vendor from charging penalty interest. Additionally, it’s the purchaser’s legal obligation to allow Section 27, unless they have valid reason to reject the request. The Supreme Court says the purchaser, “may only have regard to the accuracy of the particulars and the sufficiency of the purchase price to discharge all mortgages over the property. A purchaser may not refuse to authorise the release of the deposit on any other ground.” While a Section 27 release mainly benefits the vendor, it’s often a reasonable option for the purchaser as well.
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