Monday, August 13, 2012

Deposits - Issues and Insights to Consider

Most offers on commercial transactions are accompanied by a 'good faith' deposit.
Typically they are viewed as ‘tangible consideration’ for the offer contract attached to it, thereby confirming the Buyer’s commitment to the transaction.  Upon receipt of it, the funds are normally held in a trust account – most often with the Listing Broker.

The amount of deposit varies from deal to deal, often times based on the parties involved or the type of market condition that exists.  There are no set standards, other than those as set by either the Buyer or Seller. But it is most important to note, that once the deal is struck (agreement signed) – the deposit belongs to the deal and jointly to the parties.

For the Buyer, issues to be considered may include:
i)                    Making the deposit sufficient, so as to appear as legitmate to the Seller
ii)                   In highly competitive markets, larger deposits can strengthen the offer
iii)                 Deposits are returned to the Buyer, if conditions are not met
iv)                 1st & 2nd deposit strategy ( 1st - with offer, 2nd  - @ condition  waiver)
v)                  Large Deposits can require placement in an ‘interest bearing’ account

For the Seller, issues to be considered may include:
i)                    Specify a requirement for deposits (ie. 5% - 10% of purchase price)
ii)                   Small deposits often indicate a less than serious commitment
iii)                 Term of sale can include a forfeiture of deposit in some cases
iv)                 Larger Deposits tend to create urgency with the Buyer to close on time
v)                  ‘Interest Bearing' can help the Seller negotiate the larger deposit

Upon a successful closing, the deposit simply forms part of the purchase price and is credited to the transaction.  However, if the deal does not close, the parties must agree
on the release of the deposit by written consent.  In the Province of Ontario, this is done through a Mutual Release document, and both parties must sign off on the deposit, which includes where it is to be directed/payable to.  Keep this in mind as you provide deposits, as any deposit will not be released to either party without a Mutual Release being signed by both parties.

As with every other term on a real estate transaction, deposits are something to be negotiated, to ensure that your interests are best served within the proposed deal . As always, consult an experienced commercial broker in your area to protect your interests in the area of deposits.

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