Fighting over Earnest Money

Business conflicts always seem to revolve around money. It’s no surprise that some of the worst disputes we see at title companies are over earnest money: Who wants it. Who is entitled to it. Who thinks they’re entitled to it. Etcetera. It can get uglier than avocado appliances and shag carpet.

When a transaction fails to close, any earnest money that was deposited with the title company must be disbursed to someone. The provisions for this are in the standard contract put out by TREC – the Texas Real Estate Commission. What happens to the earnest money is spelled out clearly. Of course, that doesn’t stop people from fighting over it anyway.

The TREC contract addresses earnest money in several places. The most obvious (and easiest) is the option period. This paragraph 23 allows the buyer to terminate the contract within the specified option period and be refunded their earnest money. That’s seems straight forward enough.

Beyond the option period, determining who gets the earnest money can get more complicated and will typically require both parties to sign a release of earnest money form.

Some of the scenarios where the buyer could terminate the contract and get their earnest money back include:

• The commitment is not delivered for reasons beyond the seller’s control (paragraph 6B of the contract)

• Objections to items on the survey within a specified time (paragraph 6D)

• Not receiving/objecting to items in the seller’s disclosure (paragraph 7B2)

• Repairs exceeding 5% of the sales price (paragraph 7E)

• Damage that can’t be repaired prior to closing (paragraph 14)

• If the seller defaults on the contract (paragraph 15)

Typically, the seller gets the earnest money if the buyer defaults on the contract. With all that ink on the pages dedicated to earnest money, there shouldn’t be much room for doubt. But disputes still arise.

In many cases, the title company cannot disburse the earnest money to either party unless they both agree. And when they don’t agree, there are very specific consequences. Check out the details of paragraph 18 of the contract.

It notes that the title company (escrow agent) is a neutral third party. And that they may deduct expenses they incurred from the earnest money. Those are typically items like a new survey, tax certificate, or HOA documents that were ordered.

Either party can demand the release of the earnest money and the other party must either release it, demand it themselves, or lose it. If they both demand the earnest money, they may end up duking it out in court.

But note that this paragraph also points out that if a party wrongfully fails or refuses to sign a release of earnest money within seven days of its request, they can be liable for not only the earnest money, but damages, attorney fees, and costs of a lawsuit. Pow! Right in the kisser.

If you’re going to fight over earnest money, consult your agent, the title company, and an attorney. And be prepared to take a few knocks.

The opinions expressed are of the individual author for informational purposes only and not for the purpose of providing legal advice. Contact an attorney to obtain advice for any particular issue or problem. [where: 75230]