Using internet banking to pay deposits on a house

Rosy Sullivan

Part of what makes our CPD courses such a rich learning environment is the wealth of practical experience that you, the students, bring to the classroom. But as we swap tales from the frontlines we regularly unearth grey areas in real estate practice that cannot be easily answered on the spot in the classroom. These are issues that require further research and investigation, and often they form the basis of our newsletters to you.

Today’s newsletter addresses another one of these tricky questions. Can a purchaser use Internet banking or some other form of electronic funds transfer (EFT) to pay a deposit on a house? Please keep in mind, that we investigate these issues and “hash out the ideas” in an attempt to provide greater clarity – it should not be regarded as legal advice.

Consider this scenario for a real estate agent. During the exchange process in the sale of a house, you agree in writing to take a 0.25% deposit upon exchange of contracts, with the balance of the 10% deposit to be paid at the end of the 5 business day cooling off period. The purchaser signs the contract and tells you that they will put the 0.25% deposit in your trust account electronically. Perhaps they whip out their iPhone and transfer the funds on the spot, or maybe they say they will go home and do it on their computer.

Is this contract legally binding? Or, does it only become binding when the money reaches the trust account? What if it takes a day or two for the funds to be cleared and transferred into the trust account, as is often the case with electronic transfers? What if another purchaser came forward with a higher offer and handed over a cash 0.25% deposit in the meantime – who wins the property – the first to sign with intent to pay, or the first to actually pay?

As always, for questions of a contractual nature the contract should be your first port of call. The standard form sale of land contract in NSW has a prescribed list of terms and conditions. Clause 2.4 and 2.5 of those terms and Conditions stipulate that:

2.4 The purchaser can pay any of the deposit only by unconditionally giving cash (up to $2,000) or a cheque to the depositholder or to the vendor, vendor’s agent or vendor’s solicitor for sending to the depositholder.

2.5    If any of the deposit is not paid on time or a cheque for any of the deposit is not honoured on presentation, the vendor can terminate. This right to terminate is lost as soon as the deposit is paid in full.

These contract terms, which most NSW agents use on a daily basis, clearly give you two options: cash or cheque.  Under these standard contract terms, a purchaser cannot pay a deposit by Internet banking or EFT.  Of course, these terms could be negotiated and amended prior to exchange to include a clause that enabled the purchaser to pay by electronic transfer. However, it’s probably not worth the potential confusion this might cause.  Also, you would have to include provisions for what would happen if the funds didn’t go through, in the same way that clause 2.5 above provides for a cheque that bounces.

The trickier question is when the contract would become binding if a contract allowed for EFT. As you know, a contract has not been made and is not legally binding before the exchange of contracts and the payment of a deposit. In this situation, much would rest on how you define the word ‘payment’ in regards to an EFT. If someone owes you money, you only consider yourself  ‘paid’ when that money appears in your account, right? I think we should apply the same logic here. The contract would likely only become binding when the funds are in the depositholder’s account. Thus, theoretically it could be possible for the prospective purchaser to be gazumped by a higher offer in the time it takes before their funds reach the trust account.

These are legal grey areas that haven’t been widely considered by the courts. However, we strongly recommend that you avoid electronic deposit payments in your agency and stick to cash or cheques. Not only does it probably go against the terms set out in your contract, it probably isn’t worth the potential confusion that electronic transfers could create.