Don’t Leave the Fate of Earnest Money Deposit Funds to Chance

In almost any real estate transaction, the seller requires the purchaser to pay an initial deposit known as earnest money, which is typically held by a title company in an escrow account and subsequently applied to the purchase price at closing. However, not every transaction closes. In fact, many are terminated, sometimes by the buyer and sometimes by the seller.

That begs an important question: Who gets the deposit upon termination? Unfortunately, when parties are negotiating a purchase agreement, they’re usually focused on getting the deal done rather than on an exit strategy, so the question is often overlooked or dismissed as unimportant, even by sophisticated parties.

Don’t fall into that trap! If the contract is silent on the subject and a dispute eventually arises, a legal battle will almost inevitably ensue. That’s because, faced with a dispute, escrow companies will almost always interplead the funds into court and let a judge decide.

Thus, whether you’re a buyer or a seller, you need to make sure that your purchase agreement sufficiently addresses at least four important issues: (i) will the deposit become non-refundable at some point?; (ii) if so, when?; (iii) once it becomes non-refundable, will it be released to the seller by the escrow company?; and (iv) if the transaction is terminated, will the seller be entitled to the deposit, or will it instead be returned to the buyer?

If you’re the seller, it will generally be to your advantage to have the deposit “go hard” (i.e., become non-refundable) at some point and be immediately released to you. Having the money in your pocket gives you the upper hand if a dispute arises. You can also negotiate for a “liquidated damages” clause, which gives you the right to retain all or a portion of the deposit if the buyer defaults.

Of course, if you want any assurance that your contract adequately protects your interests and otherwise complies with applicable laws, consult a qualified attorney. Rod Woodbury can be reached at 702-933-0777 or rod@woodbury-law.com.