“Wrongful” Failure to Release Earnest Money
Earnest money disputes arise when both the buyer and seller of real estate believe that the actions (or inaction) of the other caused a Contracted-for sale to fall through. The emotional turmoil of a failed purchase and sale is usually accompanied by a determination to “cut the losses” by recovering the earnest money.
Anytime a contract for the purchase and sale of real estate is terminated, the escrow agent (title company) with whom earnest money is receipted by the Buyer is obligated to release those funds to either the Buyer or Seller. Whether the Buyer or Seller is entitled to receive the earnest money depends on the timing and reason for termination and the specific language of the Contract, itself.
The standard Texas Real Estate Commission contract form for single family residences (the One to Four Family Residential Contract (Resale) [TREC Form No. 20-13]) expressly states:
DEMAND: Upon termination of this contract, either party or the escrow agent may send a release of earnest money to each party and the parties shall execute counterparts of the release and deliver same to the escrow agent. If either party fails to execute the release, either party may make a written demand to the escrow agent for the earnest money. If only one party makes written demand for the earnest money, escrow agent shall promptly provide a copy of the demand to the other party. If escrow agent does not receive written objection to the demand from the other party within 15 days, escrow agent may disburse the earnest money to the party making demand reduced by the amount of unpaid expenses incurred on behalf of the party receiving the earnest money and escrow agent may pay the same to the creditors. If escrow agent complies with the provisions of this paragraph, each party hereby releases escrow agent from all adverse claims related to the disbursal of the earnest money.
DAMAGES: Any party who wrongfully fails or refuses to sign a release acceptable to the escrow agent within 7 days of receipt of the request will be liable to the other party for (i) damages; (ii) the earnest money; (iii) reasonable attorney’s fees; and (iv) all costs of suit.
Whether or not party’s refusal to release earnest money is WRONGFUL depends on the facts and circumstances of the failed closing. Important considerations include:
THE TIMING OF THE TERMINATION: If the Buyer terminates within a specified Option Period (also referred to as an “Inspection Period” or “Due Diligence Period”) then such Buyer is typically entitled to a refund of the earnest money. The same is true of a the period that the Buyer contracts-for to secure financing or get credit approval (see the TREC Third Party Financing Addendum). Under most circumstances (with notable exceptions), termination by a Buyer following expiration of these deadlines results in a forfeiture of the earnest money.
THE REASON FOR TERMINATION: During an inspection period, a Buyer can terminate for ANY reason and still receive a refund of the earnest money. However, following the end of this period, the Buyer has limited opportunity to terminate and still receive a refund of earnest money. These reasons are: (1) failure of the Seller to timely produce a title commitment and documents evidencing exceptions to the commitment (Paragraph 6(B)); (2) failure of the Seller to timely cure the Buyer’s valid objections to the survey (Paragraph 6(D)); (3) If the Seller fails to deliver written disclosures, or if such disclosures are not delivered on time (Paragraph 7(B)(2)) ; (4) refusal/failure by the parties to pay for repairs to the Property required by the Buyer’s lender (Paragraph 7(E)); (5) a casualty loss to the Property that the Seller cannot restore prior to closing (Paragraph 14); and (6) failure by the Seller close or other breach of the Purchase and Sale Contract by the Seller (Paragraph 15).
TERMINATION BY THE SELLER: A Seller can generally terminate a Contract only when the Buyer has failed to comply with the Contract (a Buyer default), including by failing to timely tender earnest money to the escrow officer. Where the Buyer has defaulted, the Seller is entitled to receive the earnest money.
Failure or refusal of a Buyer or Seller to release the earnest money in the face of a clear contractual obligation to do so can result in severe consequences. Parties to a failed real estate contract that results in an earnest money dispute are wise to secure the services of an experienced real estate attorney.