When a transaction is prepared and completed, realtors often use terms such as pledge, advance, deposit. They are united by the fact that they precede the final calculations, but from the point of view of their content and functioning they have differences. In this article we will look at collateral and earnest money. What is the difference? Let's figure it out.
Functions of the deposit
What is the difference between a pledge and a deposit? First of all, in the tasks of each of the monetary amounts. The deposit performs the following functions:
- payment – this type of security is characterized as payment and acts as one of the payment methods;
- security - prevents the possibility of failure by the other party to fulfill its obligations, including their improper fulfillment;
- evidentiary - indicates that the parties did not actually enter into this transaction, as a result of which they had certain obligations secured by the deposit.
The presence of these functions provides grounds for defining the deposit as an independent type of security and allows us to distinguish it from other types.
Penalty function
However, the procedure for returning it is not too difficult. Since the deposit has a penalty function, it is precisely this that guarantees the interests of both parties, which is as follows:
- If the party that gives the money as a deposit deviates from the accepted agreements, then he will lose them, since in such a situation the other party has every right to keep them.
- If one of the parties who received money in the form of a deposit does not fulfill the obligations established by the contract, it must not only return the entire amount of the deposit, but also exactly the same amount as a fine, that is, in double amount. Most often, the difference between the deposit or deposit when buying an apartment is noticeable.
In the first option, penalties are applied through non-repayment of funds, but in the second, the money will have to be collected and, most likely, this will need to be done through the court.
In addition to a fine equal to the amount of the deposit, the counterparty who violated its obligations must compensate the other party for its losses, subtracting the amount of the deposit.
If the contract was terminated due to any force majeure circumstances, the parties may agree among themselves on other methods of compensation. Let's look at the difference between a pledge and a deposit below.
Additional questions
What is not returned - deposit or deposit
Depending on the conditions specified in the agreement and preliminary contract, as well as on who failed to fulfill their obligations and caused the termination of the transaction, both the deposit and the deposit may not be returned.
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The deposit is not returned to the buyer if he has violated or terminated cooperation under the current agreement. For example, citizen Ponomarev entered into a rental agreement for a banquet hall for a wedding celebration on a certain date and made a deposit of 35,000 rubles. After some time, the wedding had to be cancelled. Ponomarev understands that he has no right to demand the money back, since the deal ended because of him.
If the management of the banquet hall had been the reason for the termination of the deal, for example, because of a fire the hall would not be ready on the specified date, then Ponomarev would have been returned not just the deposit, but its double amount.
The deposit is not returned if the pledgor does not fulfill his obligations under the main agreement. For example, Ponomarev bought a car in installments from a friend with an obligation to pay 45,000 rubles monthly for 11 months. As collateral, he gave the car seller his old car with an estimated value of 190,000 rubles. If Ponomarev does not fulfill his obligations to pay monthly amounts, the mortgagee has the right to sell his old car and distribute the proceeds in his favor in the amount of Ponomarev’s debt.
And if Ponomarev paid money regularly all year, the old car will be returned to him, and he will also become the full owner of the new car.
From the examples it is clear that the deposit is used in cases where the seller wants to protect himself from risks, and the deposit is used as the first step in the further implementation of the transaction.
Deposit when buying an apartment: is it refundable or not?
The deposit transferred as an advance payment during a real estate alienation transaction does not differ from contributions securing other contracts. If the parties enter into a deposit agreement or the money is transferred according to a receipt indicating the form of payment, then in the event of the buyer’s refusal, the money remains with the seller.
The seller's refusal to fulfill the contract obliges him to return the money in double amount. If the transaction fails due to force majeure (for example, the seller died), then only the transferred amount is returned.
In what cases is a deposit required?
The mortgage of property is used as a guarantee for the buyer to fulfill his obligations; in case of failure to fulfill his obligations, the seller, by law, can return the money he has lost from the price of the pledged property.
Deposit is required when:
- in case of obtaining a loan
- Making a large purchase
- In cases where the buyer asks to briefly delay the sale of goods, the seller may request a deposit to ensure the fulfillment of obligations.
If we consider a large deposit, then when it is returned, an agreement is concluded with all the nuances of calculating the debt and actions in case of refusal to pay for the goods received.
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If the loan agreement is taken under the condition of collateral, then if the loan debts are not paid, funds are withdrawn from the value of the property, for this purpose it is sold, and the excess money is given to the buyer. If the buyer has made all payments on time, then after the last payment the pledge agreement is automatically terminated and the pledged property becomes the property of the buyer.
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How to return money to the buyer
Property in the personal possession of the buyer can act as collateral. Depending on the amount of the contract, you can leave as collateral:
- Living space (House or apartment)
- Vehicle
- Household appliances
- Jewelry
- You can make cash as an advance payment for the goods
In what cases is it necessary to register a property pledge with government authorities:
- In accordance with the law, the rights that secure the ownership relationship to any citizen are required to be registered with government agencies.
- Provided that the subject of the pledge is the rights of the person registered in the limited liability company.
These conditions are stipulated in Article 339.1 of the Civil Code of the Russian Federation.
When mortgaging property that can be moved, mandatory registration is carried out by means of a census of issued notices of mortgaged property, received from the legislator, or from the person who received the property pledged.
If the property is destroyed, the seller has the right to demand that the buyer replace the collateral or restore it. These facts are stipulated in Article 345 of the Civil Code of the Russian Federation.
The Civil Code describes in detail all types of pledge, also indicates the subject of the pledge and provides a list of property that can act as pledged property. The parties to the pledge agreement and the obligations of the parties are also described in detail. All actions of the parties in the event of the destruction of the pledged property, change of the pledged estate of a person. Also, the rights of a citizen who has pledged property to transfer the right to claim the debt to a completely different person.
When is it possible to return the deposit from customs?
The cash deposit paid to customs can be returned in the following cases (No. 311-FZch. 1, Article 149 of the Federal Law of November 27, 2010):
- the obligation secured by cash collateral has been fulfilled in full, terminated or has not arisen;
- Instead of a cash deposit, a new security for the payment of customs duties has been introduced.
To return money from customs, the holder of the pledge (or his legal successor) must submit a corresponding application to the customs authority where the pledge was made.
Is the deposit returned to the winner and loser of the auction?
Auction and competitive bidding is often accompanied by a preliminary deposit of funds as security for the intentions of the auction participant. According to Art. 448 of the Civil Code of the Russian Federation, the deposit payment is returned to the participant:
- in case of participation, but defeat in the auction;
- in case of auction cancellation.
The refund period is 20 calendar days from the date of the auction or cancellation.
The funds contributed by the winner are taken into account as an advance payment for the subject of the auction. If the winner refuses to pay the full price, the deposit payment remains with the organizers.
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Some nuances of using a deposit
There are several groups of agreements that are considered concluded from the moment they undergo state registration. These include all transactions concluded with real estate intended for housing. Those agreements, the object of which are land plots and non-residential premises, are concluded from the moment they were signed. As a result, a situation arises that the inclusion of a provision on a deposit in an agreement that becomes valid from the moment of state registration, and the payment of its amount before registration will not cause the sanctions that are provided for in the case of a deposit. True, most often when such situations arise, the courts still recognize this amount as an advance, and it is returned to the owner, but in such a case you need to forget about its double amount. What is the difference between a pledge and a deposit when purchasing real estate is now clear.
This rule also applies to lease agreements that are concluded for more than one year, since agreements with a shorter period are not subject to state registration. Typically, when working with such amounts, realtors draw up a separate document regulating the payment of the deposit.
Deposit: consequences of failure to fulfill the main obligation
In a situation with a deposit, the procedure is simpler. As indicated, the deposit has a penalty function. Moreover, it simultaneously ensures the interests of both one and the other side. This is as follows (clause 2 of Article 381 of the Civil Code of the Russian Federation):
- If the counterparty who issued the money as a deposit violates the agreement established by the agreement, he will lose it, since the other party has the right to keep it.
- If the counterparty who received the money as a deposit does not fulfill the obligations assumed under the contract, he will have to not only return the amount of the deposit received, but also the same amount as a fine.
In the first case, the application of penalties consists of a simple non-return of funds. In the second case, most likely, it will be necessary to collect double the amount of the deposit through the judicial authorities.
In addition to a fine in the amount of the deposit, the counterparty who has not fulfilled the obligation is obliged to compensate his opponent for losses minus the amount of the deposit (see the cassation ruling of the Volgograd Regional Court dated December 16, 2011 in case No. 33-15939/11).
Agreement
In order to exclude these situations in principle, such relations are enshrined in a separate agreement (preliminary, for example), which is not registered by the state and is valid after its signing. It will help determine the difference between a mortgage and a deposit when selling a home, for example.
It is clear that the advance does not bring benefits to the buyer, since if the deal is broken, the money will simply be returned to him, although time was lost and the property was not purchased, as well as interest on the use of his financial resources by the seller. Sometimes unscrupulous sellers take an advance on purpose so that they can use other people’s money on an interest-free basis, moreover, belonging to not one, but several potential buyers.
Agreement on deposit
To ensure the execution of the transaction, it is best to enter into a deposit agreement. Even if something falls through because of the other party, the person who transferred the deposit will receive compensation for all losses. But this is also the reason for the reluctance of deposit recipients to act as responsible persons. To eliminate this contradiction, you can simply use an advance payment that does not perform a security function useful for the payer. The difference between collateral, deposit, and advance is of interest to many.
Advance as a share of the main payment
At the legislative level, the concept of “advance” has not received a precise definition. But in practice, it is understood as the payment of a specifically established amount of money for the provision of a service or the performance of some work. This term is best used to designate those payments that are previously made by one of the parties to the agreement as confirmation of the seriousness of intentions regarding the transaction. It is worth noting that the advance does not apply to the types of interim measures. It is widespread in legal relations between citizens, but many people confuse this concept with a pledge or a deposit. What is the difference? This also works when selling a summer cottage. A deposit agreement for the purchase of a land plot is signed between the seller and the buyer to confirm the buyer’s intentions to purchase this plot and the seller’s intention to sell it.
If the seller refuses to sell the land, he returns the deposit amount to the buyer and pays a fine for the failed deal. If the buyer refuses to purchase, the deposit will not be returned to the buyer.
When it doesn't come back
The deposit payment is not returned to the buyer/customer in situations where he refuses his obligations specified in the text of the agreement. In such circumstances, the buyer/customer is to blame for the failure of the transaction/contract.
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Since the earnest money payment is a form of security for obligations under a written contract, all transferred money remains with the counterparty (seller/performer).
Distinctive features of the advance
1. Form of payment:
- the subject of the pledge can be any property and rights to it;
- how an advance can be transferred to another party any property;
- the deposit acts in this capacity only when funds are transferred.
2. Consequences of unfulfilled obligations:
- if the pledgor does not fulfill his obligations, then the pledge is sold or transferred to the pledgee;
- if the obligations are secured by a deposit, if they are not fulfilled, the entire amount goes to the party that did not violate anything;
- the advance is not a measure of securing the obligations of the parties, and, accordingly, is returned to the one who paid it.
3. Transaction form:
- the pledge agreement is concluded exclusively in writing, and in some cases it is also registered with the relevant government agency;
- the deposit must also be executed by means of a written document;
- An advance can be paid to the other party even if the agreement does not contain conditions regarding the procedure for its payment.
What is the difference between a deposit and a deposit when buying an apartment? Let's figure it out. Advance payment is a more flexible method of prepayment. The seller, if the sale of the apartment does not take place, will simply return the advance payment in full to the buyer. Neither party will suffer financially. The advance and deposit are taken into account as part of the funds from the cost of the property. Collateral has a slightly different character. The buyer pledges the property with a subsequent unconditional obligation to repay the debt.
Differences from advance and deposit
The legal concept of advance is not used in Russian legislation, but in practical terms, advance and deposit are close, but not identical terms.
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An advance is also a preliminary payment before the transfer of property, provision of services or performance of work. However, it is not a form of security for obligations and can always be returned or reclaimed without any consequences for the parties. Making an advance payment does not oblige the parties to complete the transaction.
A pledge is a form of security for obligations under a contract. However, it does not apply to the advance payment and is drawn up in a separate agreement. If the deposit is expressed in monetary terms and cannot exceed the amount of the principal amount, then the collateral is usually property whose value is equal to or greater than the value of the subject of the agreement.
Typically, a collateral agreement is concluded as security for a loan agreement, for example, with a mortgage.
Thus, an advance is a preliminary payment that does not ensure the fulfillment of the contract, and a pledge is a form of security for obligations that is not a preliminary payment.
What is collateral?
What is the difference between a deposit and a deposit when buying an apartment? This is a common question that realtors are asked. Very often, a pledge and a deposit are confused, although there are significant differences between them.
The specificity of the pledge is that the fulfillment of the obligation is ensured only through the property form, and money acts only as property. If the obligations are not fulfilled at all or are not fulfilled as envisaged, then the creditor has the right to sell the pledged object, thus satisfying his own requirements. Moreover, the creditor has the property right to receive payment from the value of the pledged property (except for those cases described in legislative acts). If a client took out a loan to purchase something using real estate as collateral, then if the money is not returned on time, the bank will take away from him the property that was provided as collateral. We discussed above the difference between a deposit and a deposit when renting a premises.
The concept of “deposit” is used primarily in the rental industry, and not in the purchase and sale.
Individuals use collateral in the real estate market primarily when renting housing. The owner of the apartment has the right to demand from the tenants not only payment every month, but also any amount if the property is suddenly damaged. In this case, the repair of a broken item, for example, will be paid for by the owner from the deposit amount.
Thus, in terms of the effectiveness of material support, collateral comes first. But in terms of ease of use, registration and security as a whole, the deposit stands out.
We answered the question what is the difference between a deposit and a deposit when renting.
Do I need to deposit money without paperwork?
Since in real estate transactions deposits are always higher than these amounts, an agreement on them must be drawn up in writing. This rule is regulated by Article 380 of the Civil Code of the Russian Federation. Thus, the parties can confirm the fact of monetary payment. In this case, the agreement can be drawn up arbitrarily on the letterhead of a real estate agency or organization, etc. The main requirements: the correct preparation and content in it of the amount of the deposit and the following details:
- Full name of the counterparties or name of the organization;
- place where the parties live or legal address;
- passport data or organization details;
- the time frame within which obligations must be fulfilled;
- the subject of the agreement, that is, the real estate itself, and the address and its characterizing features must be indicated;
- signatures of the parties.
Rules of this kind also apply to advance payment agreements. Although with the latter, you can also draw up a one-sided receipt from its recipient.
Return Features
When considering the issue of returning the deposit, it is necessary to take into account that in specific cases certain features and conditions of this procedure are provided. Most often, a deposit is used at the moment in real estate transactions. So in what cases is the deposit returned?
In theory, making a deposit should guarantee the buyer's intention to purchase the property, as well as the seller's intention to no longer search for potential clients. In practice, however, things are somewhat different. The guarantee is quite conditional and depends entirely on the human factor.
The conditions for the return of the deposit in the event of failure to fulfill obligations under the contract are regulated by Civil Law. At the same time, the law provides for the registration of a deposit not only by a full-fledged agreement, but also by a receipt with the relevant details. When drawing up a receipt, you should carefully check all the specified data, since any errors may become a reason for invalidating the document.
Refund of deposit by receipt
A receipt for receipt of funds is one of the options for making an advance payment. The text must indicate that the money is transferred as a deposit for the execution of any agreement. The document must contain the following details:
- passport details of both parties;
- registration address;
- the item for which money is transferred (car, real estate, etc.);
- the exact cost of the item;
- the exact amount of transferred funds (in numerical and letter expressions);
- terms of conclusion and execution of intentions;
- signatures of counterparties.
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If the legal form of drawing up and signing a receipt is observed, it is recognized as a full-fledged agreement and entails full legal liability of the parties in court. It is not necessary to indicate the penalties of the parties in the text, since the concept of “deposit” itself already provides for those for all participants.
Under contract
When the parties sign a deposit agreement, it has the form of a preliminary agreement, which guarantees the conclusion of the main agreement (alienation of real estate, purchase and sale of a vehicle, etc.). To fully protect themselves, the parties must correctly compose the text and indicate:
- name of the document (deposit agreement);
- accurate passport data of counterparties;
- subject of the contract;
- legal action with the subject (purchase and sale, rent, performance of services, etc.);
- liability of the parties;
- conditions for the return of the deposit;
- signatures with transcript.
Since a written contract is a detailed form, the parties can specify special conditions for the return of the deposit or indicate that the money must be returned on the grounds provided by law. The conclusion of an agreement does not prevent the parties from specifying special conditions: fines for non-fulfillment or penalties.
Verbal agreement
If the deposit agreement is concluded orally, the parties cannot rely on the testimony of witnesses, although they have the right to provide written evidence. If an agreement was drawn up to receive an advance or deposit, then this indicates the existence of an agreement. If doubts arise as to the purpose of the amounts paid under the contract, they will be considered an advance and not a deposit, that is, without the function of security, but only as a share of the payment that was to be made in the future. If the forms of the deposit agreement were violated, the consequences will be the same, unless otherwise proven.
What is the difference between a pledge and a deposit is now known.
