A security deposit is required from the buyer when signing a preliminary sales agreement. Who doesn't always want to pay this amount? What is it for? Is it compulsory or negotiable? All the answers in this article.
You are about to sign the preliminary sales agreement for your future property. Unpleasantly, the drafter informs you that you will have to give him a cheque for 10% of the price when you sign. You only have 10 days left to collect this sum, which poses real difficulties for you. What can you do about it?
The security deposit (also known as an immobilisation indemnity, deposit, etc.) often represents 5 to 10% of the purchase price of the property, a significant sum in view of current property prices.
It is requested from the buyer in order to :
Reassure them of their seriousness; prove that they provide sufficient guarantees to the banks they will be applying to for a loan
Set aside a sum to be used to compensate the owner, if necessary, if he does not fulfil his commitments
To seal the commitment of both parties, the seller tying up his property and the buyer a sum of money, pending the signature of the notarial sale.
This sum is usually paid into the notary's account or into the escrow account of the estate agent who draws up your compromis. Be careful not to pay it into the seller's account, as it will be more difficult to assert your rights in the event of a dispute.
The deposit is not compulsory and as such the amount to be paid is negotiable.
It is also possible to refrain from paying a deposit but the notary or estate agent will be very reluctant to do so. Indeed, in the event of a subsequent problem, they could be held liable by the seller for not having requested a deposit.
If the sale agreement is completed, the sum is deducted from the purchase price. This is why it is often referred to as a deposit.
The provisional sale agreement may fall through for several reasons and still result in the deposit being returned to the buyer. This will be the case if a suspensive condition of the contract is not lifted (see our article Buyers: the 5 important points of the preliminary sales agreement), if the buyer uses his right of withdrawal within the allotted time (10 days), if an organisation exercises a right of pre-emption, etc.
There are 2 situations in which the deposit can be lost.
1- A suspensive condition is not lifted but this is due to bad faith, negligence, fault, or a deliberate action with a view to invalidating the compromise. The seller will then be entitled to contest the lapse of the compromis and to request its execution. In view of the slowness of legal proceedings, he may also request the application of the penalty clause (or forfeiture clause)
2- The buyer refuses to come and sign the deed of purchase at the notary's office, even though all the conditions of the deed have been met. Once again, the seller can request the execution of the sale or the application of the penalty clause of the contract.
The penalty clause, generally 10% of the purchase price but also negotiable, is a possibility to terminate the contract between the parties by paying a sum of money by the party not wishing to complete its commitment to the benefit of the party suffering the defection.
Both the seller and the buyer may be liable to pay this compensation to the other party.
Be careful, if you have negotiated down the deposit but not the penalty clause, you will be liable for the difference between the two amounts.
You don't have the cash available and you can't pay the amount requested. Here are some tips:
As mentioned above, you can negotiate down the amount of the deposit. A payment of €5,000 by someone with little financial capacity is sometimes a stronger commitment than 5 or 10% paid by a wealthier person.
Provide financial guarantees: proof of self-financing (bank certificate), a letter of agreement from your bank, etc.
The relationship of trust that you can build up with the seller will also help you to reduce the amount.
You can apply for financing from your bank. This will take some time, but if the bank is willing to finance your project, they may be able to provide you with temporary financing.
You can ask a family member or friend for a personal loan.
If you have a life insurance policy, it is possible to request an advance on this policy which you can then repay with the release of your finance.
If you have a PEE (Plan d'Epargne Entreprise), you can ask for it to be released for the financing of your main residence. But you must provide a sales agreement to support your request for early release. Negotiate with the draftsman a deadline for paying the deposit after the signing of the agreement.
It is also possible in some financial institutions to obtain a loan in return for the pledge of your PEE.
