Deposit bonds a warning to vendors

Deposit bonds are one way that purchasers use to bridge the gap when they don’t have the money to pay a deposit to the agent when they are buying land The bonds are a promise by an insurance company to pay the deposit that the purchaser would otherwise have to if the purchaser defaults under a contract. The purchaser buys the bond- most banks and building societies will sell them. In most cases the bond is never called upon because the purchaser settles and pays the whole of the money on settlement instead of the more usual balance of the price less deposit.
Vendors can check online to make sure the bond is real (there were stories of forged bonds in Sydney not so long ago) and many vendors regard the bonds as almost as good as having the money in the agents trust account. In fact some say its better because all you have to do to get the bond paid is to apply to the insurance company. You don’t have to prove that the purchaser has breached the contract in such a way that entitles the vendor to get the deposit. To get the money out of the agent often means you have to sue the purchaser and get a judgement first.
But, a recent court case has shown how the insurance company can get out of paying the bond. Reliance Developments sold land at Tuggerah to Mrs McKenzie for $1,600,000. Mrs McKenzie ‘paid’ the deposit by giving a bond issued by Lumley Insurance for $160,000. But Mrs McKenzie defaulted and Reliance terminated the contract.
On 12th September 2006 Reliance’s solicitor wrote to Lumleys saying they enclosed the original bond, a notice terminating the contract and a statement that Mrs McKenzie had not paid the deposit. The solicitors sent the letter by both fax and post. If in fact they had sent all those things then Lumley would have had to pay under the bond. But the solicitors sent the wrong notice (Mrs McKenzie’s company had rented the building and the solicitors sent a notice terminating the lease by mistake). Lumley did nothing until it got the original of the letter –the day before the bond expired on 22nd September. Lumley then wrote by ordinary post to the solicitors saying the wrong document had been sent. The solicitors got that letter on 25th September. They responded immediately, sending the right notice that day. Lumley denied liability- saying the bond had expired.
The Court said Lumley was right to do so because it was only liable if the strict conditions of the bond had been fulfilled. Commentators say that bond issuers like Lumleys do not have to give reasons for denial of claims even if the claim is made within time and the problem can be solved within time. All it has to do is sit and not pay under the bond.
Be warned.
Legal column in local papers for fortnight beginning 2nd June