Breach Of Contract Puts Earnest Money At Risk

Q: I agreed to sell my house and the closing was scheduled for a couple of months after.

My attorney notified me that the buyers had asked for an extension of the closing date. A day before that later closing date, I was told that we could not close because the buyers never signed their loan commitment letter. Several days have gone by and I am ready to put the house back on the market and drop these people like a bad habit.

The buyers put down an earnest money deposit and I want to know if we are entitled to keep it since they have not met the contract arrangements. My attorney tells me that I have to give them significant time to try and come up with a closing date before I can do that, but I feel that they have already inconvenienced me since I am scheduled to close on my new home and may need to break my contract and lose my deposit.

A: If your buyer has defaulted on your contract, you are entitled to get damages from the buyer for their breach of the contract. In some cases you may be entitled to keep the deposit as a result of a buyer’s failure to close.

Before you can keep the deposit, you must notify the buyer that he or she is in breach of the contract and give them a firm date by which they must close. If that date comes and goes without a closing, you should be able to make a demand on the party holding the earnest money to release it to you.

Unfortunately, the party holding the earnest money generally can’t just give you the money. They can release it with the signed direction of the seller and the buyer or by court order. If the buyer refuses to release the money, you will have to sue the buyer to get the money.

The key to getting the earnest money is keeping a good paper trail: having good documentation that you were ready to close on the date designated under the contract, that you gave the buyer an opportunity to cure the breach and that they never cured the breach and never closed.

In some states you may not need to give the buyer the right to cure the default, but some courts may be unwilling to give the seller the earnest money when the breach of the closing was a “technical” breach – where the buyer fails to close on Monday, but is ready on Tuesday.

If the earnest money is large, the court may want to make sure that the seller is entitled to the money under the contract. The contract may have to be very specific that the earnest money is to be given to the seller in case of the buyer’s breach of the contract as seller’s only remedy under the contract. There may be other requirements in your state and you would be wise to discuss these further with your attorney.

Oct. 3, 2005.


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