Progressing to exchange of contracts - Methods of holding a deposit (stakeholder, agent)

Learning Outcomes

After reading this article, you will be able to explain the two principal methods of holding a deposit (stakeholder and agent) in property transactions, identify the legal implications and practical consequences of each, and apply this knowledge to SQE1-style scenarios. You will also understand how each method affects the rights and risks for buyers and sellers, and the importance of clear contract drafting regarding deposit arrangements.

SQE1 Syllabus

For SQE1, you are required to understand the methods of holding a deposit in property transactions and their legal and practical effects. Focus your revision on:

  • The distinction between stakeholder and agent methods of holding a deposit
  • The legal duties and consequences for each method
  • The impact on risk, rights, and remedies for buyers and sellers
  • The importance of contract terms regarding deposit holding
  • How deposit arrangements interact with completion, default, and remedies

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. In a standard residential sale using the Standard Conditions of Sale, how is the deposit usually held?
  2. What is the main risk to a buyer if the deposit is held as agent for the seller?
  3. Who does a stakeholder owe duties to when holding a deposit?
  4. True or false: If the deposit is held as stakeholder, the seller can use it immediately for their own related purchase without the buyer’s consent.

Introduction

In property transactions, the handling of the deposit at exchange of contracts is a critical issue. The method by which the deposit is held—either as stakeholder or as agent—directly affects the rights, risks, and remedies available to both buyer and seller. Understanding these methods is essential for SQE1 and for advising clients in practice.

Methods of Holding a Deposit

When contracts are exchanged, the buyer typically pays a deposit (often 10% of the purchase price). The contract must specify how this deposit is to be held. The two main methods are as stakeholder or as agent for the seller.

Stakeholder

The default position under the Standard Conditions of Sale is that the seller’s solicitor holds the deposit as stakeholder. This means the deposit is held on trust for both parties until completion or until the contract provides for its release.

Key Term: stakeholder
A person (usually the seller’s solicitor) who holds the deposit on trust for both buyer and seller, and cannot release it to either party without the conditions in the contract being met or both parties’ agreement.

Agent

Alternatively, the contract may provide that the deposit is held as agent for the seller. This is less common and usually only applies in specific circumstances, such as on the sale of a newbuild or where the seller needs to use the deposit for a related purchase.

Key Term: agent (for the seller)
A person (usually the seller’s solicitor) who holds the deposit for the seller’s benefit, allowing the seller to access and use the deposit immediately after exchange, subject to the contract.

Legal Consequences and Practical Effects

The method chosen has significant legal and practical consequences for both parties.

Stakeholder: Rights and Risks

  • The stakeholder owes duties to both buyer and seller.
  • The deposit cannot be released to the seller until completion or until the contract allows (e.g., on buyer’s default).
  • If the contract is rescinded due to the seller’s breach, the stakeholder must return the deposit to the buyer.
  • The deposit is protected from the seller’s creditors if the seller becomes insolvent before completion.

Agent: Rights and Risks

  • The agent acts for the seller and may pay the deposit to the seller immediately after exchange.
  • The seller can use the deposit for any purpose, including funding a related purchase.
  • If the transaction fails to complete due to the seller’s default, the buyer may have difficulty recovering the deposit, especially if the seller is insolvent or has spent the funds.
  • The buyer’s risk is increased, as the deposit is not protected in the same way as with a stakeholder.

Contractual Provisions

The contract must clearly state how the deposit is to be held. If the Standard Conditions of Sale apply, the default is stakeholder unless a special condition provides otherwise. For the deposit to be held as agent, a clear special condition is required.

Key Term: special condition
A contract term that varies or supplements the standard conditions, often used to specify alternative arrangements for holding the deposit.

Impact on Remedies and Completion

If the buyer defaults and fails to complete, the stakeholder may release the deposit to the seller in accordance with the contract. If the deposit is held as agent, the seller may already have the deposit and can forfeit it if entitled. If the seller defaults, the buyer’s ability to recover the deposit is more secure if it is held by a stakeholder.

Worked Example 1.1

A contract for the sale of a house states that the deposit is to be held by the seller’s solicitor as stakeholder. The buyer fails to complete. Can the seller’s solicitor release the deposit to the seller?

Answer: Yes, but only if the contract entitles the seller to forfeit the deposit (e.g., after serving a notice to complete and the buyer fails to comply). The stakeholder can then pay the deposit to the seller.

Worked Example 1.2

A contract for a newbuild flat provides that the deposit is to be held as agent for the seller. The seller uses the deposit to fund construction. Before completion, the seller becomes insolvent. What is the risk to the buyer?

Answer: The buyer may lose the deposit or face difficulty recovering it, as the funds may have been spent and are not protected from the seller’s creditors.

Exam Warning

If the contract is silent, the deposit is usually held as stakeholder. Only a clear special condition can change this. Always check the contract wording carefully in SQE1 questions.

Revision Tip

Remember: holding the deposit as stakeholder is safer for the buyer; holding as agent is riskier for the buyer but may be needed for practical reasons (e.g., in a chain).

Summary

MethodWho Holds?Who Benefits?When Can Seller Use?Buyer’s Risk Level
StakeholderSeller’s solicitorBoth partiesOn completion or defaultLow
Agent (seller)Seller’s solicitorSellerImmediately after exchangeHigh

Key Point Checklist

This article has covered the following key knowledge points:

  • The deposit can be held as stakeholder (default) or as agent for the seller (special condition required).
  • A stakeholder holds the deposit on trust for both parties and cannot release it without meeting contract conditions.
  • An agent for the seller can release the deposit to the seller immediately after exchange.
  • Holding as stakeholder protects the buyer’s deposit if the seller defaults or becomes insolvent.
  • Holding as agent increases the buyer’s risk but may be necessary in some transactions.
  • The contract must specify the method of holding the deposit; otherwise, stakeholder is presumed.

Key Terms and Concepts

  • stakeholder
  • agent (for the seller)
  • special condition
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

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Senior Associate at Trilegal