KiwiSaver: What if a non-refundable deposit goes west?

The buyer's solicitors are undertaking that the seller's solicitor has an obligation to repay the funds. Photo / NZ Herald

Q: It is a basic principle of conveyancing that a solicitor must not provide an undertaking unless they can follow through on it. Shouldn't a solicitor have funds for reimbursing a KiwiSaver fund if a contract is cancelled after a non-refundable deposit has been paid?

Is this is a case of KiwiSaver policy failure?

A: This question came from a lawyer dealing with the pointy end of KiwiSaver first-home withdrawals. But even if you aren't in the legal business it is worth taking note of how some recent changes affect first-home buyers and the process of paying deposits.

First-home withdrawals are managed by your KiwiSaver provider but a lawyer will need to give evidence of an unconditional house sale.

KiwiSaver funds are paid to your lawyer's trust account to be paid to the seller on settlement.

Since June it has sometimes been possible to use KiwiSaver funds for a deposit on a first home before the sale has gone unconditional.

Andre Anderson, principal adviser, housing markets, at the Ministry of Business, Innovation and Employment explains: "There are two different scenarios under the act: one where the agreement is already unconditional; and one where it is still subject to conditions.

"When it is unconditional at the time the undertaking is given, nothing has changed from the position prior to this year's amendment.

"The buyer's solicitor is still required to undertake that any KiwiSaver funds will be repaid to the fund manager if settlement fails.

"To fulfil their undertaking, the buyer's solicitor should not transfer any of their client's KiwiSaver funds to the seller unless and until settlement occurs.

"When the agreement remains subject to conditions, the buyer's solicitor provides different undertakings.

"Because the solicitor will be paying the KiwiSaver funds to the seller's solicitor before settlement, the undertaking is that, if settlement fails to occur, the seller's solicitor is under an obligation to repay those funds to the buyer's solicitor, who then undertakes to repay the amount they receive.

"The important point is that the buyer's solicitors are undertaking that the seller's solicitor has an obligation to repay the funds, not that the seller's solicitor will actually repay the funds."

For information on the changes to KiwiSaver first home withdrawals, see IRD tax information bulletin.