Can I Get My Earnest Money Back?
Most people have heard the phrase “earnest money,” which generally refers to money deposited (usually with an escrow holder) to show a good faith intention of a buyer to consummate a purchase of property (usually real estate). Buyers often do not understand how earnest money operates and what determines its fate when a real estate transaction falls through. The overwhelming majority of real estate contracts are conditional in some way- that is, the parties agree, either expressly or impliedly, that the transaction will not close unless or until certain conditions have been met. Most often, purchase and sale agreements provide for a period within which a buyer may back out of the transaction if they have not satisfied themselves that completing the purchase would be a good choice. In the real estate industry, the buyer’s process for evaluating the property to make a final decision of whether to purchase is referred to as “due diligence,” and the time provided in a contract for the buyer to cancel is referred to as the “due diligence period,” or sometimes the “feasibility period.” In addition to this period for the buyer to investigate, the purchase agreement will often provide for additional contingencies; some of the most commonly found contingencies include: (a) the buyer qualifying for financing; (b) title contingencies (i.e., the seller clearing title prior to closing, such as securing lien releases or obtaining court approval for a sale from a decedent’s estate, etc.); (c) building/occupancy permits or land use approvals; etc.
A well drafted purchase agreement will provide clear deadlines for these contingencies to be met. When the deadline arrives, the contract ordinarily provides for one of two structures: (a) the contract automatically terminates if the buyer does not waive the contingency; or (b) the contingency is automatically waived unless the buyer gives notice of the buyer’s election to terminate the contract. Buyers should pay careful attention to the details of these provisions, as failing to do so could result in mistakenly waiving a contingency and being on the hook to close the contract, or in mistakenly failing to waive the contingency and having the contract terminate when the buyer meant to continue with the purchase.
In a “seller’s market,” (i.e., one where multiple buyers fiercely compete for a limited number of available properties), buyers are sometimes tempted to waive the due diligence period and also waive contingencies in order to make their offer more attractive to the seller. But this can be a dangerous strategy, especially when the buyer makes the decision hastily or lacks the sophistication or resources to thoroughly perform due diligence before entering into the contract.
Generally speaking, as long as a buyer has not waived contingencies and cancels the purchase and sale agreement before the due diligence/feasibility period has expired, the buyer is entitled to receive their earnest money back. But in most cases, once those deadlines have passed, the buyer must either proceed with the purchase or forfeit their earnest money. There are exceptions to this general principle, such as when a seller is unwilling or unable to convey good title to the property at closing as agreed, or when a seller has failed to make statutorily required disclosures to the buyer. Keep in mind, however, that some purchase agreements include the buyer’s waiver of the right to receive such statutory disclosures. In rare instances, the buyer may still be able to avoid proceeding to close (even when due diligence/feasibility deadlines have passed) if the buyer can show that the seller induced the buyer to enter into the contract via fraud (e.g., intentional misrepresentation), or that the seller breached its own pre-closing obligations (e.g., failing to allow the buyer reasonable access for inspections, failing to cooperate with necessary third parties, etc.).
Buyers in real estate transactions should carefully weigh what amount of earnest money they are comfortable with- that sum typically represents what the buyer stands to lose if they change their mind too late in the process.
The lawyers at Beresford Booth have a wealth of experience counseling and representing clients in earnest money disputes and real estate transactions generally. We would be happy to assist you.
To Learn More about Can I Get My Earnest Money Back?, please do not hesitate to contact us at info@beresfordlaw.com or by phone (425) 776-4100 for assistance.