Evaluating Earnest Money Disputes

Anatomy of an Earnest Money Dispute

Let’s face it, a large number of real estate contracts do not close. No matter how pure the intentions of the buyer and seller, many variables pose hazards to consummation of real estate deals.

Some of the deal-killing factors are within the control of the parties. For instance,  Sellers sometimes decide not to sell and opt to remain in the property for personal reasons such as loss of a job prospect or changed relocation plans. Other times they get “seller’s remorse” after signing a contract and decide to accept or seek out a higher offer.

Buyers are equally guilty when it comes to purposeful breaches of contract.  On occasion a buyer will find another property that they like better (after the option period has expired) and seek a “clever” way to terminate.  Sometimes buyers decide that writing a now-accepted contract was a rash decision. Cold feet set in, and the idea of taking on the challenges (and expense) of making a contracted-for property their own becomes overwhelming.

Most often, some factos beyond the parties’ control is the barrier to closing. An appraisal less than the purchase price, title defects and survey defects are the most common culprits.

When a real estate contract falls through – whether through a party’s fault or otherwise —  disposition of the earnest money frequently becomes a point of contention. Many of the calls we receive each week relate to Earnest Money Disputes.  So who gets the earnest money when a real estate contract falls through?

Factors We Consider In Evaluating Earnest Money Disputes

When deciding whether to accept an Earnest Money Dispute case, we analyze the following factors:

1. How Much Earnest Money Is Involved?

The dollar value of the earnest money in dispute represents the “amount in controversy.”

Losing any amount of earnest money is frustrating. However, most real estate lawyers will only accept those cases where the amount in controversy justifies the time to be expended in  handling the dispute.

Most contracts for the purchase and sale of real estate contain an one or more provisions shifting attorneys’ fees to the prevailing party. However, where earnest money disputes are involved, parties typically recover fees in those few cases that go to court.

2. Who Is At Fault?

Did the party seeking our help comply with the contract?  Contract compliance includes performing the party’s obligations and not terminating other than for permitted reasons. It also involves timely making demand for release of the earnest money and responding to the opposite party’s demand.

3.  Does the Contract Address the Reason for Termination?

Frequently, disposition of the earnest money is spelled-out in the contract.

For example, a buyer who terminates during an option period is almost always entitled to a refund of the earnest money.  Conversely, a buyer who fails to timely obtain lender approval but terminates after the Buyer Approval Deadline contained in the Third-Party Financing Addendum is rarely entitled to the earnest money.

Claims involving disputes over Earnest Money are fact intensive. The feasibility of each case turns on its own circumstances and the acts of the parties. They are time-sensitive and nuanced.