What Happens to the Deposit If a Property Sale Falls Through in Victoria?

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The Role of the Deposit in a Property Contract

Under the standard Law Institute of Victoria (LIV) Contract of Sale, the deposit is a security for the purchaser’s performance of the contract.

  • It is usually 10% of the purchase price

  • Held in a trust account by the agent or conveyancer

  • Only released at settlement (unless a Section 27 early release applies)

If the contract proceeds to settlement, the deposit is applied towards the purchase price. But if the deal falls through, the treatment of the deposit depends on who caused the failure and why.

If the Purchaser Defaults

If the purchaser:

  • Fails to settle on time, and

  • Doesn’t remedy the breach within the 14-day Notice of Default period, then

  • The vendor may rescind the contract and retain the deposit

This is explicitly allowed under General Condition 28 of the LIV contract.

Additionally, the vendor may:

  • Claim damages for the difference if the property later sells for less

  • Recover advertising, holding, and legal costs associated with the failed sale

The deposit becomes non-refundable once a valid rescission occurs due to purchaser default.

If the Vendor Defaults

If the vendor:

  • Cannot provide clear title

  • Fails to settle due to their own breach

  • Is unable to provide vacant possession as promised

…then the purchaser may:

  • Rescind the contract, and

  • Be entitled to a full refund of the deposit

The purchaser may also claim interest, out-of-pocket costs, and in some cases, damages if they relied on the sale completing (e.g. they sold another property or moved in anticipation).

Can the Parties Agree to Refund the Deposit?

Yes. If a contract is cancelled by mutual agreement, the deposit can be:

  • Returned in full to the purchaser

  • Split between the parties in a negotiated share

  • Partially retained by the vendor with written consent

In all cases, both parties must sign a written direction to the stakeholder (usually the agent or conveyancer) to release the funds.

Is Forfeiture Automatic?

No. Even if a purchaser defaults, the vendor must still take formal steps:

  • Issue a Notice of Default

  • Allow the full 14-day period to elapse

  • Then issue a formal rescission notice

Only after rescission can the vendor instruct the stakeholder to release the deposit. Acting too early can jeopardise the vendor’s rights.

What If There’s a Dispute?

If one party refuses to authorise release:

  • The stakeholder cannot unilaterally release the deposit

  • The matter may need to be resolved by:

    • VCAT

    • Court proceedings

    • Mediation or legal negotiation

This is why it’s critical to follow the correct procedure and obtain proper documentation before releasing funds.

David Dawn’s Advice to Vendors and Purchasers

“The deposit is a bargaining chip and a security—it must be treated with care. We always ensure correct notices are issued and client positions are protected.”

At Victorian Property Settlements, we:

  • Draft and serve default and rescission notices

  • Handle all trust account directions properly

  • Guide vendors and purchasers through dispute resolution, if needed

Final Thoughts

In Victoria, who keeps the deposit depends on who breached the contract—and whether proper procedures were followed. Vendors must follow the steps to lawfully rescind, while purchasers should act promptly to protect refund rights.

Need Advice on a Failed Property Sale?

Victorian Property Settlements – Trusted by Victorian buyers and sellers for over 25 years.
📍 Frankston | 📞 03 9783 0111 | ✉️ david@quick32.com
🌐 www.victorianpropertysettlements.com.au