On 24 October 2006, the Law Society of NSW and the Real Estate Institute of New South Wales (REINSW) jointly developed the Residential Conveyancing Protocol, which has been refreshed in March 2021 on behalf of their respective members.
The Law Society of NSW and the REINSW recognise that solicitors, real estate seller’s agents and buyer’s agents need to work together as professionals to ensure an efficient conveyancing process for residential property transactions, for the benefit of all parties in the transaction.
The Residential Conveyancing Protocol gives clarity to areas where differences of opinion and practice exist.
In the Trust Account Department, we receive queries on whether deposit money held in conveyancing transactions is trust money (especially when settlement doesn’t occur, or the contract is disputed/rescinded)?
The Uniform Law provides that trust money is held by law practices in a manner that protects the interests of the persons for whom, or on whose behalf, it is held[1].
Trust money is money entrusted to a law practice and it is broadly defined under section 129 of the Uniform Law.
Deposit money paid pursuant to a sale of land contract, is therefore, trust money within the meaning of section 129 of the Uniform Law.
Law practices’ obligations in dealing with trust money are set out in sections 135, 137 and 138 of the Uniform Law and require the money to be deposited into a general trust account.
Trust money includes controlled money[2].
If the deposit money paid by the purchaser is required to be invested, this is a type of trust money called ‘controlled money’ for the purposes of Uniform Law.
Law practices’ obligations in dealing with controlled money are set out in section 139 of the Uniform Law and require the controlled money to be deposited into the account specified in the written direction relating to the money.
Regardless of whether the deposit is held in general trust account or invested in a controlled money account, sections 138 and 139 of the Uniform Law require the law practice to hold the trust money exclusively for the person on whose behalf the funds were received, and to only disburse the funds in accordance with a direction given by the person.
The Law Society is of the view that the deposit money is held in trust for both the vendor and the purchaser and as such the funds can only be disbursed in accordance with a direction from both parties, or by way of a court order.
The Residential Conveyancing Protocol confirms the process if settlement does not occur:
“11.1 The seller’s agent, the buyer’s agent, the vendor’s solicitor and the purchaser’s solicitor acknowledge that if the matter does not complete, the stakeholder can only deal with the deposit with the written authority of each party or court order.
11.2 The solicitors and the agent or agents will mutually co-operate to obtain a written authorities authorising the stakeholder to account for the deposit.
11.3 If the stakeholder does not receive the necessary authorities to account for the deposit , the solicitor acting for the party entitled to the deposit will advise his or her client of the possible need to obtain an order from a Court of competent jurisdiction.”
Solicitor as a stakeholder
In the Standard Contract for Sale of Land in NSW, clause 2.1 provides the deposit is paid to the depositholder as stakeholder. The term depositholder is defined in clause 1 as the vendor’s agent, the vendor’s solicitor or if no vendor’s solicitor is named in the contract as the buyer’s agent. Professor Butt states “a stakeholder is a person who holds money independently of two or more claimants to be applied in a particular way when a particular event occurs”[3]
In Mario Salvo & 2 Ors v New Tel Limited (2005), Handley JA explained the role of a stakeholder as follows: “A deposit under a contract of sale held by a stakeholder abides the outcome of the contract. If completion occurs, it becomes the property of the vendor as part of the purchase price. If completion does not occur for reasons other than the default of the purchaser, it is refunded to the purchaser.”
Matters have come to the attention of the Trust Account Department where there is a dispute between the vendor and the purchaser as to whether a contract has been terminated or rescinded. Irrespective of the purchaser’s or the vendor’s view of the contract having been terminated or rescinded, the solicitor is not in the position of arbiter on that difference of opinion. This conclusion is clear from section 139(2) of the Uniform Law which provides the law practice that holds money deposited must not disburse the money except in accordance with “a later written direction given by or on behalf of the person on whose behalf the money was received.”
Relevant Case Law
There have been a number of cases which confirm that in these circumstances the solicitor is expected to comply with his or her obligations both under the Uniform Law and common law with respect to avoiding a conflict of interest
- In the Harrington v Hoggart (1830) case, an auctioneer (Mr Hoggart) was employed to sell an estate in Monmouthshire in July 1813 (by Sir John Edward Harington, Baronet) and received a deposit from the purchaser (Mr Frederick Secretan). The purchase failed to proceed. Lord Tenterden Chief Justice stated that the auctioneer was not a mere agent, but a stakeholder and “a stakeholder does not receive the money for either party, he receives it for both; and until the event is known, it is his duty to keep it in his own hands”. [4]
- In the Burt v Claude Cousins Ltd (1972) case, a real estate agent (Fox & Sons) was employed to find a purchaser for the Castle Hotel in Castle Combe, Wiltshire (the village where the film Dr Doolittle was made). Another real estate agent (Claude Cousins & Co Ltd) without agreed terms advertised the hotel and the advert was seen by a builder in Surrey (Mr Bert). Lord Denning stated that “if an estate agent or solicitor, being duly authorised in that behalf, receives the deposit ‘as stakeholder’, he is under a duty to hold it in medio pending the outcome of a future event. He does not hold it as agent for the vendor, nor as agent for the purchaser”.[5]
- In the Alicja Polbratek v Annross Partners Pty Limited trading as Centro Real Estate (2016) case, Annross Partners Pty Limited (trading as Centro Real Estate) sold a property in Gascogne Street, Prestons to Mr Tony Gulaboski in May 2014. The contract failed to complete and the vendor (Alicja Polbratek) terminated the contract. Annross Partners Pty Limited was criticised for not releasing deposit monies after termination of the contract for the sale of land. The Hon Justice Drake stated “in such circumstances, where the plaintiff’s entitlement to receive or direct the deposit was not clearly established, the first defendant had the right to refuse such instructions from the plaintiff (pending consent from the second defendant or an order of the Court)”[6]. Justice Darke cautioned stakeholders from taking a position in any dispute between the parties, “If a stakeholder considered that circumstances had arisen whereby one of other of the parties was entitled to the funds, the stakeholder could pay the funds to that party. However, the stakeholder would do so at its own risk that he or she may turn out to be wrong.”
Conclusion
To quote the passage in Re a practitioner[7], in which the Full Court of the Supreme Court of South Australia observed: “trust account[s] should be sacred, so that moneys paid into the account should only be paid out to the persons to whom the money belonged, or as they directed”.
The Law Society considers a solicitor has obligations under common law as depositholder/stakeholder and additional obligations imposed by the Uniform Law and uses these principles to inform any conclusion regarding the conduct of a solicitor in the operation of his or her trust account.
Should you have any queries about trust money or deposit money in conveyancing matters, contact the Trust Accounts Department on [email protected] or (02) 9926 0337.
