Navigating Earnest Money Disputes

Land Title takes great pride in helping our customers successfully close their real estate transactions. However, not all contracts result in closings, and occasionally disputes arise between buyer and seller concerning the return of earnest money.

The Basics

When a buyer and seller enter into a Contract to Buy and Sell Real Estate, the buyer agrees to pay a defined amount of earnest money, which will be held by an independent third party (most often the title company), for the benefit of both seller and buyer, and pursuant to the terms of the contract. Why do we have earnest money? The short answer is that the contract requires it. But, historically, the purpose of earnest money is to represent a buyer’s good faith in entering into a real estate contract. When the parties enter into a real estate contract, the seller takes the property off the market while the parties perform the required due diligence in an effort to consummate the transaction. If the buyer’s attempted termination of the contract is untimely or is based upon a reason that isn’t contemplated in the contract, the buyer forfeits the earnest money to the seller. If the transaction closes, then the earnest money is credited to the buyer’s purchase price. 

Termination by Buyer

There are many circumstances described in the contract that allow a buyer to terminate the contract without forfeiting the earnest money. In most circumstances, the buyer must provide notice of the termination on or before a pre-determined date. If the buyer terminates timely and in accordance with one of the allowable circumstances defined in the contract, the earnest money holder may return the funds to the buyer. If the buyer terminates, but the termination is not in compliance with the terms of the contract, the earnest money may be disbursed to the seller. Upon termination of the contract, the earnest money holder will request mutual written instructions from the buyer and seller before disbursing the funds.

The Earnest Money Dispute

On occasion, upon the termination of the contract, the buyer and seller don’t agree about who is entitled to the earnest money. If the earnest money holder determines, in its sole discretion, that an earnest money dispute exists, the contract allows the earnest money holder to do only one of three things:

• Hold the earnest money and wait for the resolution of any court action between buyer and seller; or
• Initiate a court action and deposit the funds with a court of competent jurisdiction; or
• Provide notice to buyer and seller that unless Land Title receives a copy of the summons and complaint between buyer and seller containing the case number of the lawsuit within 120 days of the notice, Land Title is authorized to return the earnest money to buyer.

 Resolving the Dispute

The contract typically requires the parties to mediate any dispute that arises relating to the earnest money, and mediation is often a great first step toward resolving an earnest money dispute. However, mediation might not make sense financially, depending on the amount of the earnest money at issue, which might incentivize the parties to work out the dispute before mediation. Given that the earnest money holder holds the earnest money for the benefit of both parties, it cannot pick either side in resolving the dispute, requiring a resolution to be reached by the parties. 

The Seller Must Act

If the seller is entitled to the funds, but the buyer disagrees, the seller must take action. Once there is an earnest money dispute, there are no circumstances in which the funds will be automatically disbursed to the seller (even if the buyer is clearly not entitled to the funds). If you represent the seller and believe that your client is entitled to the earnest money, you must get the buyer to agree either informally or through mediation. If mediation is unsuccessful, the seller needs to obtain a court order directing the earnest money holder to return the funds to the seller. If you sit back and wait, the funds will either remain with the escrow holder, will be interpled to the court, or will be returned to the buyer automatically 120 days after the earnest money holder provides notice of the same. 

Although Land Title is always eager to assist its customers, once an earnest money dispute exists, our ability to help is limited. If you need assistance in determining how to proceed when you have an earnest money dispute, please reach out to a licensed real estate attorney. 

Please reach out to your local Land Title Sales representative or Closer with any questions.