In a recent High Court case, In the Matter of Protim Abrasives Limited (In Liquidation) and In the Matter of the Companies Acts 1963 – 2009 [2009 No 510 COS], it was held by Judge Kevin Feeney that monies paid by a purchaser to a vendor’s solicitor by way of a pre-contract deposit, in the absence of a contrary agreement, is paid to the vendor’s solicitor as agent of the vendor, and not as stakeholder, and were in effect paid to the vendor. 

When the vendor went into liquidation without having returned the deposit monies to the purchaser, the deposit monies became assets in the liquidation and the purchaser then became an unsecured creditor.

It was also held that General Condition 5(c) of Law Society’s standard Conditions of Sale that states that the deposit is to be paid to the vendor’s solicitors as “stakeholder”, whether the sale is by auction or private treaty, cannot apply and does not bind the vendor until such time as the vendor signs the contract and it is exchanged and becomes binding.

The judgment reviewed the case law in relation to deposits and noted that, in the absence of agreement to the contrary, an auctioneer receives (a pre-contract booking deposit) as stakeholder and not as agent of the vendor.

The case is under appeal and the committee will keep the matter under review. In the meantime purchasers’ solicitors need to take appropriate care. One way of dealing with this issue would be to return the contracts with a cheque for the deposit and to include a paragraph as follows in your covering letter:

"The cheque for the deposit attached is sent subject to the following pre-condition, namely that it will be held by you (or your firm) in trust for the purchaser until contracts are exchanged in a manner acceptable to both vendor and purchaser from which time the money can be held as stakeholder under the terms of the contract. If you are not willing to accept payment of the deposit subject to this condition please return it immediately."

If it is intended to pay the deposit by electronic transfer of funds the wording of any email and/or letter sent to the vendor’s solicitor in advance of transferring the funds and/or forwarding the contract documentation should contain a similar pre-condition.