Recovering Earnest Money in a Purchase and Sale Dispute
The process of buying and selling a home can involve a myriad of potential issues, just one of which was addressed in Ryan Foltz’s excellent article here about the dangers of waiving an inspection contingency. Even so, to be competitive in an aggressive market, buyers will often waive not only inspection contingencies, but financing contingencies, title contingencies, and more to secure a deal. When something goes wrong, potential homebuyers and sellers will find themselves in a dispute where an earnest money deposit hangs in the balance, and without contingencies, the buyer will face an uphill battle.
In the purchase of real estate, it is common for a buyer to put down an earnest money deposit, which acts as a good faith deposit towards purchasing the real property on sale. Though sometimes the earnest money can be released to the seller immediately, more typically, an escrow company will hold the funds until closing, at which time the deposit will go towards the ultimate purchase price of the property. Purchase and Sale Agreements frequently list the forfeiture of earnest money as the exclusive remedy in the event of a breach by the buyer. In these cases, the damages for a buyer’s breach are essentially known beforehand, thus constituting a form of liquidated damages.
If the parties cannot resolve their issues amicably, however, the party holding the earnest money (“Holder”) will interplead the earnest money deposit funds with the court, leaving the parties to litigate their respective claims of entitlement to those funds. RCW 64.04.220 governs many of the relevant provisions, setting forth timelines for release of the earnest money. For example, if a party demands the earnest money when a transaction fails, the Holder must notify the other party to commence an objection period. If the Holden does not receive an objection, the Holder must disburse the earnest money to the requesting party. On the other hand, if the Holder does receive an objection, the Holder has a timeline to commence an interpleader action if the parties cannot resolve the issue amicably. The Holder can recover its attorney’s fees and costs in the interpleader action but does not typically actively participate after it interpleads the funds. Instead, the buyer and seller are left to litigate responsibility for breach of the Purchase and Sale Agreement, and ultimately, who has the right to the earnest money deposit.
As an interesting aside, while RCW 64.04.005(1) states that the earnest money to be forfeited may not exceed 5% of the total purchase price, this does not preclude recovery of additional damages. Indeed, if a buyer puts more than 5% down, the buyer has additional risk that the Court will nonetheless investigate and award the actual damages suffered by the seller. The damages awarded will depend significantly on the circumstances surrounding the transaction, including but not limited to, any carrying costs the seller had to take on for longer term closings.
In any case, purchase and sale disputes often involve complex and time-sensitive issues. Should you find yourself in a difficult position pertaining to any kind of real estate dispute, including those involving real estate transactions, the lawyers at Beresford Booth can assist you in achieving resolution. If you need assistance with any real estate issues, please do not hesitate to contact us at info@beresfordlaw.com or by phone at (425) 776-4100. We would be pleased to assist you with any real estate issues you encounter.
