Disputes over earnest money are a reality of real estate transactions and can be very emotional for either side of the transaction. The release of earnest money is governed by the TREC form 1-4 contract and it’s amendments.
1) Buyers Failure To Obtain Financing
The most common dispute are home buyers failure to obtain financing. The TREC contract paragraph 4-A , if checked makes the contract contingent upon financing. The Third Party Financing Condition Addendum contains a blank in the first paragraph that sets a number of days the buyer has to obtain financing. During this period if buyer is unable to obtain financing buyer must notify the seller, in writing, of such and earnest money is returned to the home buyer. After the the contingency expires then contingency is waived. If notice is not given and buyer is unable to obtain financing the earnest money goes to the seller. Many home buyers do not understand this.
2) The Contract Provisions
Paragraph 18.C through E address the procedure for release of earnest money
C. 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.
D. 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 liquidated damages in an amount equal to the sum of: (i) three times the amount of the earnest money; (ii) the earnest money; (iii) reasonable attorney’s fees; and (iv) all costs of suit.
E. NOTICES: Escrow agent’s notices will be effective when sent in compliance with Paragraph 21. Notice of objection to the demand will be deemed effective upon receipt by escrow agent.
Upon failure of the contract for any reason, the party wanting the earnest money must send written demand to the title company. A copy of the demand should be sent to the other party. The written demand triggers a 15-day period during which the other party may make written objection to the title company. A phone call will not meet the requirements of the contract. Email or fax would be sufficient, but certified mail to both the title company and the other party is best, particularly if litigation is a possibility.
The language of the contract is vague about which demand–demand from the party wanting the earnest money versus demand from the title company–triggers the 15- and 7-day periods, but it is prudent to be conservative and assume that these periods begin when the first party makes written demand.
Stay tuned for part two