Deposit of Earnest Money NOT Required to Form Real Estate Contract
Formation of a valid contract for the purchase and sale of real estate in Texas does NOT require a Buyer to deposit earnest money. Even if a contract expressly requires the Buyer to make the earnest money deposit within a certain time, failure to do so does NOT mean that no contract has been formed.
Stated differently, payment of the earnest money deposit is not a condition precedent to formation of a binding contract.
Instead, a Buyer’s failure to timely make the agreed-upon earnest money deposit is a default, authorizing the Seller to take certain actions.
WHAT IS REQUIRED TO FORM A CONTRACT IN TEXAS?
Parties form a binding contract in Texas when the following elements are present:
(1) an offer,
(2) an acceptance in strict compliance with the terms of the offer,
(3) a meeting of the minds,
(4) each party’s consent to the terms, and
(5) execution and delivery of the contract with the intent that it be mutual and binding.
“Meeting of the minds” describes the mutual understanding and assent to the agreement regarding the subject matter and the essential terms of the contract. Weynand v. Weynand, 990 S.W.2d 843, 846 (Tex.App.-Dallas 1999, pet. denied). Mutual assent, concerning material, essential terms, is a prerequisite to formation of a binding, enforceable contract. T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 221 (Tex.1992).
WHAT DOES THE CONTRACT SAY ABOUT THE EARNEST MONEY DEPOSIT?
The Earnest Money paragraph in the TREC One to Four Family Residential Contract provides:
5. EARNEST MONEY: Within 3 days after the Effective Date, Buyer must deliver $_____________ as earnest money to , as escrow agent, at _______________________________________________ (address). Buyer shall deliver additional earnest money of $____________ to escrow agent within _____ days after the Effective Date of this contract. If Buyer fails to deliver the earnest money within the time required, Seller may terminate this contract or exercise Seller’s remedies under Paragraph 15, or both, by providing notice to Buyer before Buyer delivers the earnest money.
The Texas Realtors Commercial Contract contains substantially similar language:
5. EARNEST MONEY: Not later than 3 days after the effective date, Buyer must deposit $ as earnest money with ____________________________ (escrow agent) at________________ (address). If Buyer fails to timely deposit the earnest money, Seller may terminate this contract by providing written notice to Buyer before Buyer deposits the earnest money and may exercise Seller’s remedies under Paragraph 15.
Notably, both of these forms specify that the earnest money deposit is to be made within 3 days after the contract’s Effective Date. The Effective Date of the TREC residential contract is the date last executed by a party (see page 8 of 10). Similarly, the prescribed effective date of the TXR commercial contract is “the date the escrow agent receipts this contract after all parties execute this contract.”
PAYMENT OF THE EARNEST MONEY DEPOSIT IS NOT “CONSIDERATION”
In general, a promise is a sufficient consideration for a return promise. Where a real estate contract is concerned, the consideration which creates a valid contract is the purchaser’s promise to pay. For that reason, there is no legal requirement that there be an earnest money deposit or down payment.
“The consideration which creates a valid contract for the sale of real property is the purchaser’s promise to pay”; rejecting argument that because buyer “failed to pay the [promised] $600,000 deposit, the parties’ agreement lacked the consideration necessary to create a binding contract.”); Century 21 All W. Real Estate & Investment Inc. v. Webb, 645 P.2d 52, 55 (Utah 1982) (“[T]he agreement contained mutual promises, which provide adequate consideration to make the agreement binding”; “[w]e cannot agree . . . that the Earnest Money agreement failed for lack of consideration because the seller . . . never received the $100 deposit.”); Cowman v. Allen Monuments, Inc., 500 S.W.2d 223, 227 (Tex. Ct. Civ. App. 1973) (same).
SELLER’S REMEDIES IF A BUYER FAILS TO MAKE THE EARNEST MONEY DEPOSIT
The language of the contract generally specifies the Seller’s remedy for a Buyer’s failure to deposit earnest money: termination or pursuit of contractual remedies.
In short, the Buyer’s failure to deposit the earnest money as agreed-upon does not invalidate a real estate contract. Instead, a Seller must take affirmative action to invoke remedies for this failure.