Creating a Well-Rounded Non-Refundable Deposit Agreement Template

Non-Refundable Deposits: What You Need to Know

The purpose of a non-refundable deposit is to ensure that a party who pays a deposit does not avail him or herself of a right to reclaim it even if the purpose for which it was made fails. This type of clause is commonly used in situations where one party is taking a risk in exchange for a benefit at the other end.
For instance, a non-refundable deposit is commonly used in real estate transactions where a real estate agent collects a non-refundable deposit from a purchaser so that upon execution of a deal, a seller may receive some consideration in light of the fact that a buyer may be backing out of a deal . A seller could for example sue the real estate agent for the deposit, in an attempt to make whole at least a portion of the damages resulting from a failed transaction.
Legally, the term non-refundable deposit has no significant meaning. However, a clause entitled "non-refundable deposit" is in fact a forfeiture clause, and needs to satisfy the legal requisites to be enforceable – most notably, the terms need to be clear and unequivocal. A forfeiture provision, whether it is labelled a "non-refundable deposit" clause or not, must be for the benefit of the party receiving the deposit. A clause will be regarded as a forfeiture clause whether it is designated "non-refundable deposit" or not.

Key Components of a Deposit Agreement Document

Although the non-refundable deposit has become ubiquitous, its implementation can vary considerably. A competent real estate attorney can help to ensure that your deposit agreement is formed with a clear understanding of the rules of engagement. For a real estate broker, some of the key elements of a deposit agreement could include:
PAYMENT TERMS:
The broker agrees to hold a non-refundable deposit in the amount of $XX,000.00. The deposit will be paid by the buyers and can be sent by wire or certified funds. The sellers require non-refundable deposits in the amounts set forth in the Form Purchase and Sale Agreement. The deposit is to be held in a fair and reasonable manner by the broker and safeguarded until such time that the broker gives the qualified buyers the green light to purchase the property. (The buyers should not wire the deposit until they have received an email from the broker indicating that the buyers, in fact, are green lighted to purchase the property). Agents are well served by having a deposit agreement embedded in their standard operating procedures. A broker can be exposed to liability if they are not acting in accordance with their duty to safeguard the money.
FORFEITURE OF DEPOSIT
The deposit will be deemed forfeited if any of the following conditions are met:
A. If the buyers fail to perform the terms of an agreement to purchase the property and if none of the exceptions set forth in the deposit agreement are applicable.
B. If the buyers fail to enter into a binding agreement to purchase the property.
C. If the buyers cancel their agreement to purchase the property in writing and the sellers do not exercise their right to remain bound for 10 calendar days.
FORM OF PAYMENT
Forms of payment that are generally accepted include international wire transfer, certified funds, or other forms of payment considered reasonable by the broker. Generally, electronic money transfers such as Paypal, Zelle, or cryptocurrency are not acceptable. Agents are well served by having a deposit policy embedded in their standard operating procedures.
DELIVERY DATE – AGENT’S RIGHT TO CHANGE THE AGREED DATE
The deposit is due on or before the earlier of: (i) the date agreed to in a Form Purchase and Sale Agreement, or (ii) within one banking day after receipt by the buyers of written American Acceptance of Terms signed by the buyers and sellers. This gives the buyers the opportunity to review the Terms with their attorneys before submitting the deposit.
HELPFUL HINTS
Forfeiture of the deposit is not to be confused with termination of the offer. The buyer’s failure to deliver the deposit does not mean that the offer is not effective. In other words, an offer is an offer until it has been expressly rejected. Likewise, just because the seller has a right to terminate the agreement and keep the deposit does not mean that the seller must do so. A seller can alternatively sue for specific performance. Things happen at every level of the deal and the seller’s counsel should be consulted to remove the guess work out of the equation.

Important Legal Considerations and Requirements

A well-crafted non-refundable deposit template requires attention to various legal considerations to ensure compliance with applicable laws and to avoid future disputes. The primary legal frameworks governing non-refundable deposits vary by jurisdiction and industry, and they primarily aim to protect consumers from unscrupulous business practices.
For instance, in the context of consumer services, the Federal Trade Commission (FTC) and state regulators have made concerted efforts to curb deceptive billing practices, including the use of non-refundable deposits in certain circumstances. Under the FTC’s Telemarketing Sales Rule, certain payments are prohibited, including non-refundable advance payments of more than $24, unless the payment is part of a purchase with a total price of at least $100. In the event that any deposit provision is utilized, it is critical that the deposit is clearly explained and that the terms are clearly laid out so that consumers can be informed before they proceed.
Businesses should also be familiar with state laws surrounding non-refundable deposits in specific industries. For example, in the real estate sector, non-refundable security deposits are prohibited in some states, such as Illinois. In the hospitality industry, most jurisdictions require that hotels and other lodging facilities refund the non-refundable deposits for certain situations, such as if the hotel cancels the reservation. Additionally, even if certain non-refundable deposits are allowed by state law, there may be additional policies or regulations imposed by trade organizations which govern the implementation of non-refundable deposits.
One of the most fundamental legal concerns associated with non-refundable deposits is the need for transparency in the agreement. For instance, if the non-refundable deposit is meant to simply guarantee the completion of the primary contract, the agreement can be voided if the primary contract is unfair or deceptive. Additionally, if the primary service or goods are not delivered, the purchaser or customer could very likely win a case alleging a failure to deliver on the original contract.
In many jurisdictions, notification of the non-refundable deposit provision is required, and prior to using non-refundable deposit language, a business may be required to provide their customers with a written explanation of the intended uses for the deposits, a total price for the goods or services, and a statement that the deposits are non-refundable. However, such requirements vary by jurisdiction and area of business, and it is critical that businesses consult with a knowledgeable attorney to ensure sufficient transparency in the non-refundable deposit agreement.
Given the complexity and potential pitfalls of non-refundable deposit agreements, seeking the advice of a qualified professional is recommended when drafting such an agreement. Counsel will be experienced with the potential legal hurdles that companies may face when enforcing an agreement containing a non-refundable deposit provision.

How to Make a Deposit Agreement Template Work for You

Now that I’ve hopefully convinced you of the necessity for a formal non-refundable deposit and have discussed some of the pitfalls of relying on "standard" language in your contracts or being too restrictive in your definition of services to include what you provide for the deposit, you may be wondering how to go about documenting a solid non-refundable deposit agreement.
First, we’ll discuss an issue that’s probably got you scratching your head. That is, how to make your non-refundable deposit agreement repeatable and adaptable for multiple clients? The answer is to create a template.
A well-crafted template can be a springboard to creating new, easily adaptable non-refundable deposit agreements. When crafting your template, you should consider broad and narrow templates, clarity, repeating terms, and what to avoid.
A broad template is one that serves as a "one size fits all" for all of the services that you provide. For example, perhaps you wish to have an explicit non-refundable cash flow protection for wedding photography services. You may have a template that states, "Once wedding photography is contracted, all payments made are for services rendered up to and including the date of cancellation."
The problem with a very broad template is that it is not adaptable to other services that you provide which have different ways in which they are rendered. For example, an engagement session is likely to be very different from a wedding, so why should they be treated the same way in a cancellation?
Because a broad template may not account for services that you provide in a completely different way from other services that you provide, you should also consider creating narrower and more adaptable templates.
A narrow template has set verbiage that is easily customizable to a specific situation with a specific client. A narrow template could say, "Once [service description] is contracted, all payments for [date] are made for services rendered up to and including the date of cancellation . " To determine whether a particular template is broad or narrow, the simplest thing to do is to determine whether the brackets represent specific parts of your business that change from client to client.
There are two tips you should use when creating and implementing your templates. The first is that you should make your template repeatable. That is, you should create a consistent format for your templates that includes things such as logo, number of pages, date, etc. Customers should know what to expect when viewing your deposit agreements. The second tip is that you should make your template customizable. A simple way of making your template readily customizable is to create a detailed list of line items into which you can plug specific dollar amounts. For example, the line items for a wedding photography template could be: (i) deposit amount and (ii) number of payments remaining.
Clarity is another important area to focus on when creating your template.
Once you have created your template and feel comfortable with the language and orientation of the clause, you should use the template as the basis for the content of your agreement. One way to do this is to keep the template language at the top of the agreement, and then follow it with a numbered list of instances where customization is necessary. The numbering could be used to describe: (i) the reason for any customizations, such as a date, specific service, or person; and (ii) the specific customization necessary for each instance.
Other than clarity, there are two other aspects you should strive for in your non-refundable deposit agreement to make them even more effective. The first is repeatability. Once you have created what amounts to a template once, you should use it every time thereafter, unless you see a compelling reason to revise it. The second is customizability. While your template should contain consistent language and orientation, you should also allow enough space in your template for customization for each specific client.

Common Traps and How to Avoid Them

Perhaps the most common pitfall associated with deposit agreements is the failure to draft or review the agreement while keeping in mind the applicable principles of the law for the state in which the contract takes effect. Oftentimes this leads to a scenario whereby there is inadequate guidance as to what is or is not permissible for the deposit. Here are some examples of the most common errors: So how can this be avoided? Careful review of the governing state’s laws should be completed before drafting either the deposit itself, or its supporting purchase agreement. Even conducting a simple on-line search of "non-refundable deposit laws in ______________________" will usually provide you with useful results that will lead you to more information specific to your state.
Another common pitfall is the use of ambiguous language relative to refundability. Haphazardly considered language may lend itself to misinterpretation of the deposit’s conforming agreement. Here are just a few common scenarios which have been known to land parties in court: So again, how can this be avoided? As with the first pitfall, it is important to refer back to the applicable state laws. From there, it is important that both parties (and available witnesses to that party) be fully on board with the intended meaning of the language used in the contract. This includes clarifying language from any verbal communication with the other party. Ambiguous language surrounding the defining parameters of a non-refundable deposit will not be invalidated because one party entered the contract under a different understanding than that of the other party.
For these reasons and more, it is very highly recommended that any party entering into an agreement containing a non-refundable deposit contact an attorney for guidance on the best practice for the controlling state.

Case Studies and Examples

Where I live, in South Carolina, we have rich commercial and law traditions and this is evident in the ability to create binding agreements for non-refundable deposits. Some of the industries have been doing this for years and they offer a repository of sample agreements from which you can adapt your situation.
One of my clients is an established event planning company that works with wedding and event venues and suppliers. More than a year ago, one of her clients contacted me needing assistance with the cancellation of their wedding plans, which had occurred more than six months prior to her contacting me. I recall that she was quite shocked to discover that she was not entitled to receive a refund of her deposit. Every letter she wrote I replied both with an explanation of the law and a sample case that addressed the situation she had experienced.
The case is Byrum v. Stewart, 89-CP-10-59 (Ct. Com. Pl. Newberry County, April 14, 1993). In this case, the Court held that the deposit was non-refundable and that Byrum was not entitled to be repaid the deposit because it was due and owing to the defendant. In her case, the client and her attorney could not get past the idea that the pre-marital contract was unenforceable. At the end of the day, a contract was signed. At the moment the contract was signed, Byrum received the benefit of the contract as contemplated. She used the deposit to reserve the services of Stewart Farms and at this point , Stewart Farms was under no obligation to Byrum to complete the contract. She treated the deposit as such and therefore the contract had been performed to the extent Stewart Farms could do so. I asked my client to share with her the letter I had written to the other bride explaining the decision that we had prevailed in the case. This other bride then wanted to explore whether suing the contract was a good idea.
Sometimes people need to experience something before they understand it.
Another case addressed the situation where a wedding planner and a photographer had not entered into a written non-refundable deposit agreement, but instead relied on the oral and implied terms of "industry practice" and "course of dealing." The case is Ferri v. Ferri, 2011 WL 5190849 (Ct. App. R.I. November 2, 2011). The Court considered both industry practice and course of dealing in holding that the photographer was entitled to retain the deposit.
In both cases, the parties had an idea what the implications of non-refundable deposits were and what conduct they might rely on, but the absence of the non-refundable deposit agreement confused the parties and the Court had to go through the analysis of looking at "industry practice" and "course of dealing." In the Ferri case, the photographer had gone out of business and the bride only recovered a portion of her deposit. In the Byrum case, the original contract was kept intact and the client lost her deposit. If there had been a well-drafted non-refundable deposit agreement in place, then these cases would have never reached the Court.
These cases demonstrate the importance of having a well thought out non-refundable deposit agreement in place.