Where the deposit sits until settlement: trust accounts in a sale

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Kooky

Builder of Shaka, the payment router that pays every agent their commission on closing date.

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A buyer who signs a contract for a Queensland home hands over a deposit within days, often tens of thousands of dollars, to a business they may have met once. The seller does not receive it. It stays out of both parties' reach for the weeks or months until settlement, and most people on either side of a sale could not say exactly where.

The answer is a trust account: a bank account that belongs to an agency or a law practice in name but holds only other people's money, under rules set by Parliament and policed by a regulator. This guide follows the deposit through that account. It explains why a third party holds it, the two sets of rules that apply depending on who the holder is, what must be recorded, the moment the money can lawfully leave, what happens if the contract ends or the parties disagree, how the rest of the price passes through a trust account on settlement day, and what protection exists if trust money is misused. It is a description of the general rules. It does not cover how much the deposit should be or when it can be forfeited, which are questions about the contract.

Office of Fair Trading Queensland, guidance on handling trust money under the Agents Financial Administration Act 2014.

Why a third party holds the deposit

A deposit is the buyer's proof of commitment, and it only works as proof if the buyer cannot simply take it back. It is also money the seller has not yet earned, because the sale has not completed and may not. The solution, far older than any current statute, is a stakeholder: someone who holds the money for whichever party turns out to be entitled to it.

The standard Queensland contract provides for this in its deposit clause, clause 2 in the current edition for houses and residential land. The contract names a deposit holder, and the buyer pays the deposit to that person. In most sales through an agency the deposit holder is the seller's agent. It can also be the seller's solicitor, and occasionally another law practice.

The identity of the holder matters more than buyers tend to realise, because it decides which body of rules protects the money. An agent's trust account and a solicitor's trust account do the same job under different laws.

Two holders, two rulebooks

The two regimes share a set of ideas. Trust money is kept apart from the business's own money. It goes into the bank promptly. Every receipt and payment is recorded against the matter it belongs to. Nothing leaves without authority. And an outside party checks the books. The details differ, and the next two sections take each in turn.

The agent's trust account

The Office of Fair Trading's guidance for the property industry sets out what an agent must do with a deposit from the moment it arrives.

The money must be banked into the trust account before the end of the first business day after it is received. The agent must complete a trust account receipt and keep a duplicate. The guidance lists what the receipt has to show, and the list is a useful description of what a buyer should expect to be given: a heading identifying it as a trust account receipt under the Agents Financial Administration Act 2014, a unique number in a consecutive series, the name of the principal licensee and the licence number, the date the money was received and the date the receipt was written, the name of the person who completed it, who paid and for whom the money is held, what the payment was for, the amount and the method of payment.

Inside the agency, the deposit is entered in a ledger for that sale. The guidance requires a cash book, a journal and a ledger, a reconciliation of the trust account every month within five days of the month's end, and the keeping of all of it for five years. Trust accounts in the industry are also subject to audit, on which the Office of Fair Trading publishes separate guidance for agents and for auditors.

One rule in the guidance is stated bluntly. All trust money must be distributed directly from the trust account, and it is illegal to pass it to recipients through the agency's general account. The trust account is not a waiting room on the way to the business's own bank account. Money leaves it only for the person entitled to it.

The office also describes a variant: a special trust account opened for the sale of one property, in which that sale's money is kept separately from the agency's general trust account. Whether one is used is a matter for the parties and the agent in the particular sale.

The solicitor's trust account

When a law practice holds the deposit, the Legal Profession Act 2007 applies and the Queensland Law Society is the regulator. The society describes trust accounting as the recording by a trustee of the receipt and payment of other people's money into individual trust ledger accounts, and says it holds statutory responsibility for regulating how solicitors' trust accounts are run.

Its published answers to practitioners' questions give the outline. A general trust account must be kept with an approved authorised deposit-taking institution, in Queensland, under a name that includes the words "law practice trust account" or the abbreviated form. The society must be told within 14 days when one is opened. Withdrawals need the signature of an authorised principal, or of other authorised people as the regulation allows, and cheques must be payable to a named person and never to cash or bearer. Electronic transfers are permitted under the society's own guidelines, and a practice declares its compliance with them each year.

The central rule is in section 249 of the Act. In the society's words, a law practice must disburse trust money only under a direction given by the person on whose behalf it is held. A trust account alert published by the society treats a breach as a substantial one and gives the maximum penalty as 50 penalty units.

The books are checked from outside here too. The society's trust accounting pages deal with external examiners, who examine a practice's trust records, and with the society's own power to investigate.

What the money is while it waits

For the weeks between contract and settlement the deposit is in a legal middle state. It is not the agent's or the solicitor's, which is why it cannot be used to meet the business's expenses or be drawn on for commission. It is not yet the seller's, which is why a seller cannot ask for it to help fund their next purchase unless the contract and the law provide a way. And it is no longer freely the buyer's.

This is the practical meaning of the word stakeholder. The holder owes duties to both sides and takes instructions from neither alone. The Queensland Government's guidance for sellers puts the agent's part in four steps: place the money in a trust account, calculate the commission, forward the balance to the seller after settlement, and account in writing.

It follows that the questions buyers most often ask have plain answers. The deposit is not at risk from the agency's ordinary business fortunes in the way a payment into its trading account would be, because it is held separately. It does not move when the contract becomes unconditional. And nobody, including the seller, can direct it elsewhere on their own say.

Release at settlement

The Office of Fair Trading's guidance fixes the moment. A deposit, or a final payment of purchase price, may be withdrawn from an agent's trust account only when the transaction is finalised, meaning when the sale settles or the contract is terminated.

It also fixes the order. The seller is paid first, or at the same time as other payments. The agent's fees, charges and commission come last, and may be taken only as the appointment provides and with the client's written authorisation.

In an ordinary sale the arithmetic is simple. The deposit is usually larger than the commission and the agreed marketing costs, so the agent keeps what the appointment allows and sends the remainder to the seller. Where the deposit is smaller than the commission, the seller pays the difference from the sale proceeds. Either way the deposit is not part of the money that moves through the electronic settlement, because it is already sitting with the deposit holder. The settlement figures simply give the buyer credit for it.

The written account matters. The Queensland Government's guidance for sellers says the statement must set out all amounts received and how they were paid, and must disclose any payment, discount or benefit the agent received from a third party. It is the seller's record that the deposit went where it should have.

If the contract ends before settlement

Contracts end for ordinary reasons. A buyer withdraws during the cooling-off period, a finance condition is not met, a building report leads to termination. Under the Office of Fair Trading's guidance, termination finalises the transaction just as settlement does, and the money can then be paid to the party entitled to it.

Who that is depends on the contract and on how it ended, which is a legal question outside this guide. What the trust rules add is that the holder must then act on it.

A case reported by the Real Estate Institute of Queensland in February 2021, and by Proctor when the courts dealt with it, shows the point. A buyer had paid a deposit of $24,500. Finance fell through and the contract was terminated. The buyer and the seller agreed that the deposit should go back to the buyer. The agent did not return it, keeping $20,000 as commission and paying the rest to the seller. The tribunal found that the agent was required to pay the deposit to the buyer immediately once the seller's solicitors had confirmed the termination and asked for its return. It rejected the argument that the Act's dispute procedure applied, saying the provision does not allow an agent to adjudicate on the rights of the parties. And it found that any entitlement to commission was a matter between agent and seller, unrelated to the deposit. The institute's report says the agent was fined $5,000 and had to reimburse the claim fund the $24,500 it had paid the buyer.

The institute drew the lesson for its own members: act on the lawful instructions of the parties.

When buyer and seller disagree

The harder case is a real dispute, where each side says the deposit is theirs. A buyer says a condition was not met; the seller says the buyer defaulted.

A stakeholder cannot resolve that, and is not allowed to try. For agents, the Agents Financial Administration Act 2014 contains a procedure for disputed trust money, in section 26 as the institute's report cites it. The tribunal's reasoning in the case above marks its limit: it is a procedure for a holder faced with a real dispute, not a licence to choose a winner.

For law practices, the Queensland Law Society's guidance describes a three-step approach to disputed money. The practice writes to the other party saying it intends to pay the money in a stated way unless a court application is made within a stated period, of which one month is given as an example. Failing that, it keeps the funds until there is a written agreement or a court order. If two years pass with no agreement, it lodges a return with the Public Trustee under section 713 of the Legal Profession Act.

For the parties, the consequence is delay. A seller who relists and sells again, or a buyer who wants the money for another purchase, may wait until the disagreement over the first contract is resolved.

The rest of the price, on settlement day

The deposit is one trust account story. The balance of the price is another, shorter one.

A buyer's own contribution, the part not covered by the deposit or the loan, usually travels through the trust account of the buyer's solicitor or conveyancer. The buyer pays it in a few days ahead so that it is cleared by settlement day. From there it becomes one of the sources of funds in the electronic settlement.

The Queensland Law Society has warned practices about the authority needed for that step. Its trust account alert on electronic lodgment networks says that where trust money is involved in a settlement on one of the networks, the client authorisation form must be completed, and that failing to do so breaches section 249 because the money would be paid without the client's direction. The same alert says written authorities are needed for trust money paid outside the platforms, giving duty paid to the Queensland Revenue Office as an example. For a buyer this explains the paperwork: the forms signed before settlement are what allow the solicitor to release the buyer's money on the day.

On the seller's side, the proceeds may be paid straight to the seller's bank account from the settlement, or to the seller's solicitor's trust account first where there are costs or other payments to make. The Queensland Government's guidance for buyers describes the final payment as going to the seller's conveyancing firm, which places it in a trust account, and reminds buyers to obtain a receipt.

If trust money goes missing

Misuse of trust money is rare, and both regimes are built on the assumption that it will sometimes happen anyway. Each has a fund behind it.

For agents it is the claim fund under the Agents Financial Administration Act 2014, administered by the Office of Fair Trading. The office's guidance lists improper handling of trust account money, and theft or misuse of money entrusted to an agent, among the grounds for a claim. A claim must be lodged within one year of the person becoming aware of the loss and no more than three years after the event. The office decides straightforward claims itself and refers complex ones to the Queensland Civil and Administrative Tribunal.

For law practices it is the Legal Practitioners' Fidelity Guarantee Fund, administered by the Queensland Law Society under the Legal Profession Act 2007. The society says it reimburses people who lose money through a dishonest default by an associate of a law practice, that it does not cover negligence, and that the society must be notified within six months of the loss being discovered.

Both funds respond to dishonesty, not to disappointment. A disagreement over who is entitled to a deposit, or a complaint about service, is not a claim on either.

What a buyer or seller can check

None of this requires a party to audit anyone. A few ordinary observations confirm that the rules are being followed.

The contract names the deposit holder, and the money should be paid to that name and to an account described as a trust account. A receipt should follow, with the details the guidance requires. A seller is entitled to the agent's written account after settlement and can ask for it sooner. And a party who believes trust money has been mishandled has a regulator to go to: the Office of Fair Trading for an agent, the Queensland Law Society for a law practice.

The deposit is safest when it is dull: banked the next day, receipted, recorded, and left alone until the sale either settles or ends.

Kooky, from Shaka

Kooky edits Queensland Estate and builds Shaka, the payment router he made for Queensland property professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

About Kooky and Shaka →