Olivia Egdell-Page: Legal Advice on paying a ‘holding deposit’

Should we pay a £10,000 ‘holding deposit’ to secure our dream house? The seller says if we don’t exchange on time they can keep the money

Article by Ed Magnus For Thisismoney.co.uk 20 June 2023

My wife and I are looking for a new home to buy. We have accepted an offer on our current property, but not exchanged contracts. 
We found a new home that was perfect, but after making our first offer we became embroiled in a bidding war against a cash buyer. It went to best and final offers, so we went in with our strongest bid.
Because our offer is dependent on the sale of our old house going through, the seller says he will only accept our offer if we pay a £10,000 holding deposit. 
This is to be held by our solicitors and will be considered part-payment of the 10 per cent deposit due on exchange of contracts.
If we fail to exchange by 15 July, the seller says he will have the right to withdraw from the agreement and walk away with our £10,000. We think we can make this deadline as our buyer is paying in cash. 
The money will only be returned if there is a fundamental problem with the legal title or if our surveyor says there is a fundamental structural issue. The seller says he and his lawyer will ultimately have the right to decide what is ‘fundamental’.
His solicitor is going to issue a document for us to sign saying we agree to this.
Is this a strange request, and should we agree or are we taking too much risk? In fact, is it even legal?  

Ed Magnus of This is Money replies: 

This is certainly a niche request by the seller. 

Holding deposits are rare when buying a home, other than when a new property is being bought off-plan and might not be finished for several years. 

If you agree to this seller’s terms, there is significant risk involved given that have not yet exchanged contracts on your own sale.

It’s also worth knowing that currently more than one in five sales fall though, according to Rightmove.

I imagine a lawyer will advise against this or at very least, suggest pushing back the deadline the seller is proposing. 

It typically takes between eight and 12 weeks from agreeing a sale to being in a position where contracts can be exchanged, but in some cases it can take much longer.

By only giving yourself a month, you are taking a big gamble. There can’t afford to be any hold-ups.

There are so many factors that can cause delay. The property searches, inconsistencies with the title deeds, issues with planning consents such as loft or garage conversions that have not been properly approved, as well as problems relating to the mortgage application or survey, can all slow down the legal process. 

The deadline of 15 July is also rather tight. It might be worth seeing if you could change that to the end of August, to take into account any unforeseen problems that may unravel from either the survey or your lawyers.

It may also be worth seeing if the seller would be prepared to compromise on the basis that you’ll organise and pay for a survey immediately, to show that you are committed. 

But the seller may be unwilling to change his terms. If you truly love the house, it may therefore be a risk you have to take.

We decided to discuss the matter with Jeremy Leaf, north London estate agent and a former Rics residential chairman, and Olivia Egdell-Page, partner and head of the property department at Joseph A. Jones & Co solicitors.

Is a holding deposit normal when buying a house? 

Jeremy Leaf replies: 

I fully understand the seller’s requirement for you to make a financial commitment. He clearly doesn’t want to waste his time, or find out further along the process that you are unable to proceed. 

The problem of trying to lock in buyers and sellers as part of the conveyancing process has persisted for many years. 

In Scotland and other parts of Europe, holding deposit systems do operate – but it does mean the market is rather stuck and doesn’t include the flexibility that the system in England presently offers.

Olivia Egdell-Page replies: 

We are seeing a greater uptake of these ‘exclusivity’ or ‘reservation’ agreements, more akin to those used by developers in the sale of new-build properties.

The exclusivity agreement in this case will give the seller additional financial security, and proof that the buyer is committed to the property before the transaction has reached the point of exchange of contracts.

Whilst such an agreement does not guarantee completion will ultimately take place, it does offer a degree of security and a financial incentive to both parties, which is why we are seeing these agreements being used more often.

That being said, exclusivity agreements do not take a standard form, and the terms are a matter for negotiation between the parties, which is where your solicitor will need to be involved.

You must consider the circumstances in which you are permitted to walk away from the transaction with your deposit, and I can see the seller has already set out their proposed terms. 

Are holding deposits legal? 

Jeremy Leaf replies:

I am not sure that the £10,000 proposal is legal, so firstly I would recommend you speak to your solicitor to check on the legalities or otherwise of the suggestion. 

I am not comfortable with the premise that the seller and his solicitor are playing judge and jury in their court, and can determine what is ‘fundamental’ and ‘reasonable’ in these circumstances. 

You also need reassurances that the seller will take the property off the market and not offer it to anyone else, if you enter into this agreement.

Olivia Egdell-Page replies:

To request a deposit prior to exchange is ‘legal’, however it must be approached with caution. 

Any payment made would need to be accompanied by an exclusivity agreement, which must be carefully drafted and agreed between the parties to ensure your respective interests are protected.

For the seller and his solicitor to have the sole discretion to decide what is ‘fundamental’ is not entirely reasonable, and you should consider and clearly define what, if anything, would be sufficient for you to walk away from the property. 

What would you advise? 

Jeremy Leaf replies:

Much depends on how much you have fallen in love with the property and how much you want it. Also, how likely are you to find a suitable alternative in the same location? 

You could perhaps try offering a lower deposit so you have some ‘skin in the game,’ but not to the same extent. 

If you are reluctant to potentially lose that sum, you could try to be as transparent as possible and run the purchase in tandem with his sale so that they are both at roughly the same stage. 

For example, if you have a survey on his property, he has a survey on the property he is buying, and so on. It’s all about building trust and being as open as possible.

As in all these situations, the market will prevail. And if supply and demand are such that this is a property you don’t want to miss out on, then maybe you will be tempted to pay the £10,000. 

Otherwise, you ought to look for an alternative property that is available without  such pressurised circumstances.

How could they speed this house purchase up?

Ed Magnus replies:

There isn’t a huge amount you can do to make this sale go more quickly, as you are relying on number of different people.

You’ll have to be prepared to pick up the phone and chase everything to give yourself the best chance. 

Delayed searches are one aspect of a house purchase that a buyer and their conveyancer have little control over.

Instructing the conveyancer to begin local searches as soon as the offer is accepted is one obvious way a buyer can speed up the process.

An alternative option is to contact the local council to try and chase things up – although there is no guarantee this will speed up the process.

If you are willing to pay an extra fee, you could also contact a personal search company, who will conduct their own investigations to speed the process up.

You can do this via the Council Of Property Search Organisations website, which lists a range of companies that can help.

The nuclear option for buyers who are unable to get their searches completed in time is to go ahead with the sale anyway, and take out search indemnity insurance to cover any costs that might come up as a direct result.

The caveat here is that this will be subject to your mortgage lender’s approval – and many banks and building societies won’t accept it. 

If you can get approval, the insurance can cost as little as £20, according to the HomeOwners Alliance.  

It will typically cover some, but not all, of the issues that would have otherwise been revealed had a search been carried out before completion.

It enables buyers to proceed with their house purchase in the absence of local search results with a little more reassurance – at least monetarily speaking.