It is not advisable for a buyer's deposit under a property purchase contract to be paid to the seller's solicitor as agent due to the risk of the deposit becoming difficult to recover where the seller's default or insolvency results in non-completion. Notwithstanding this starting point, there are circumstances in which a buyer will have little option but to agree to its deposit being held as agent.
The Standard Conditions of Sale (Fifth Edition) provide that the seller can use the deposit for the purchase of another residential property in England and Wales and the chain should be researched to ensure that the deposit will be held as stakeholder by solicitors at the top of the chain. The Standard Commercial Property Conditions (Second Edition) provide that except on an auction sale, the deposit will be held by the seller's conveyancer as stakeholder and in the case of an auction, the auctioneer will hold as agent.
In the case of new residential developments, developers may require the deposit to be held as agent. NHBC Buildmark provides deposit protection insurance in the event of non-completion due to the builder becoming insolvent or committing fraud.
If the deposit is held as agent, the buyer may claim a lien against the property for repayment of its deposit. A lien is a form of equitable charge. The case of (1) Georgina Eason (2) Michael Sanders (as joint liquidators of Alpha (Student) Nottingham Ltd) v Anthony Yiu-Wing Wong (2017) held that equitable liens were enforceable against a company which had contracted to develop and sell student apartments before going into liquidation. It did not matter that the legal estate did not yet exist (due to construction not being completed) as the developer had contracted to create a legal estate which was identifiable out of a legal estate which did exist. The lien attached to the legal estate which was the lease which the developer had contracted to grant. In fact, the legal estate was in the airspace which would have been occupied had the apartment been built. On the sale of the site on which the buyer's apartment would have been built, the buyer ranked as a secured creditor to receive a proportion of the sale proceeds to the extent of the buyer's interest secured by the lien. There were a number of buyers in this case and their interests ranked equally with each being entitled to the pro rata distribution of the sale proceeds to the extent of their security.