When you buy property, there is a constant stream of paperwork, many referred to by unhelpful names like a “Section 27”. Clients are sometimes confused as to why this document exists or whether they should sign, so here’s a quick rundown.
The deposit
When purchasing real estate, a purchaser must pay a deposit upfront to secure the purchase. This is usually 10% of the sale price (although you can negotiate a lesser amount).
Once paid, the deposit is usually held in a trust account by the real estate agent (or sometimes by a lawyer or a conveyancer). If the purchaser pulls out, the vendor may be entitled to keep the entire deposit amount.
Come settlement, the purchaser gives the vendor the balance of the sale proceeds in return for the title of the property. If no Section 27 has been served, at this time, the deposit will also be released to the vendor less the real estate agent’s costs.
So what is a Section 27?
The vendor may want early access to the deposit to enable them to purchase another property or to pay down their mortgage. Also known as early release of deposit authority, the Section 27 is a written request by the vendor for early release of the deposit. It contains details of any mortgage or caveats over the property which allows the purchaser to make an educated decision about whether to consent to the deposit’s release.
In certain circumstances, lawyers consider it safe for the purchaser to consent to the vendor accessing the deposit before settlement. Most importantly, the vendor should have sufficient equity in the property to enable the mortgage to be discharged at settlement without relying on the deposit and they should not be in default of their mortgage.
If a purchaser agrees it is safe for the vendor to have early access to the deposit, they can sign the Section 27. Once this done, whoever is holding the money on trust is authorised to release the deposit to the vendor.
If a purchaser objects to early release (and they need to state a reason for the objection), the vendor won’t be able to access the deposit until settlement.
If a purchaser neither consent or objects to the request, 28 days after service of the Section 27, the deposit can be released to the vendor by the person holding it in their trust account.
A purchaser has 28 days from receipt of the Section 27 to object to release. It is permissible for a real estate agent to provide the Section 27 with the contract so that time begins to run from the signing of the contract. It is not cool, however, for an agent to ask a purchaser to sign a Section 27 consenting to release of the deposit at this time. This is because a purchaser is entitled to have a reasonable opportunity to assess the information (or have their lawyer assess it).
Is it a good idea for a purchaser to sign a Section 27?
If the details from the bank show the vendor to have sufficient equity in the property to be able to discharge the mortgage at settlement, we think it is a good idea for the purchaser to consent to early release (and if they want to take extra steps to protect their interests, lodge a caveat or take out title insurance).
First, it facilitates good relationships between all parties involved in the transaction, and if you later require some goodwill in return, they will be more likely to agree to some leniency (say if your bank delays settlement and the vendor is deciding whether to charge penalty interest or let you have early access to the property).
Second, the Supreme Court has said a purchaser ‘may only have regard to the accuracy of the particulars and the sufficiency of the purchase price to discharge all mortgages over the property. A purchaser may not refuse to authorize the release of the deposit on any other ground’.
That said, this area of the law is untested and unclear. There is a school of thought that a purchaser has the right to object to a Section 27 on the basis that the contract contains ‘a condition enuring for the benefit of the purchaser’. This phrase in the legislation was meant to cover special conditions benefitting the purchaser such as finance conditions. But some argue (and the Supreme Court has not clearly said whether this is right or wrong) that all contracts contain such conditions, such as the condition that the vendor deliver vacant possession or the condition that the vendor deliver the property in the condition sold. Following this logic, a purchaser could object to early release of the deposit and in reality, no vendor is likely to take them to court about this.
In these situations, sometimes a compromise can be reached whereby the purchaser agrees to release the deposit solely for the purposes of reducing the mortgage (and the deposit is then paid directly to the vendor’s mortgagee).
But wait, I’m a vendor! Don’t I have a right to access my deposit prior to settlement?
There are many reasons why a vendor might want early access to the deposit money: as a deposit on a new property, to pay down their mortgage or just take a little holiday.
But early release of the deposit can never be guaranteed (say if the purchaser wanted to make an argument such as above) and we strongly advise that a vendor does not rely on the success of a Section 27 request.
Also, a section 27 request can take some time to prepare if the vendor has a mortgage on the property, as the document should annex written confirmation from the relevant bank about the details of the mortgage. It can take a while to get this information, particularly if the vendor’s bank is a smaller bank or not one based in Victoria.
We do our best to prepare Section 27 requests for our vendor clients as quickly as possible, but there is no guarantee that a bank will get back to us promptly or the purchaser will consent. For these reasons, we recommend that vendors don’t rely on early release of the deposit.