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Real estate escrow cancellations and dealing with Earnest Money Deposits

Dear Clients and Friends,

A legitimate good faith dispute may exist between a buyer and seller over entitlement to the buyer’s Earnest Money Deposit (EMD) when a Real Estate sales transaction fails to close.

A seller that feels entitled to the EMD or a buyer who feels that a refund is owed will each try to get escrow to release the EMD to themselves. However, Escrow cannot release those funds without instructions signed by both the buyer and seller or there is a court order requiring it to do so. Most parties will dispute the other party’s demand. This results in the parties then having to negotiate an agreement to release the deposit or, alternatively, escalate the matter to a mediation, arbitration, or litigation.

It is not without consequences for a party to not agree to the deposit being released, as one’s disagreement must be done legitimately This means that without a valid, reasonable claim the deposit is to be released as soon as possible. If their is not a good-faith dispute, a party must agree to allow the deposit to be released within 30 days of receiving a written demand from the other party.

Even when buyers breach the purchase agreement, they are still entitled to a refund of their entire good faith deposit when the seller incurs no money losses due to the breach. Further, a seller who refuses to release the buyer’s deposit and cancel escrow instructions based on the buyer’s breach has acted in bad faith. As well, sellers need to document their losses to be entitled to the funds and to be deemed as acting in good faith.

The primary function of these rules is to distance escrow from buyer-seller disputes over funds held in escrow. Escrow officers are not in the business of mediating disputes between transaction participants.

Cancellation of an escrow upon the release of an EMD does not cancel the underlying purchase agreement. By canceling escrow but not the purchase agreement, the rights of either party to litigate any past or future performance of the purchase agreement remains.

For example, a buyer’s cancellation of only the escrow due to the seller’s nonperformance does not later affect the buyer’s right to pursue specific performance of the purchase agreement to acquire the property. The purchase agreement remains in effect, unless participants in the transaction also cancel it while canceling escrow instructions.

When a seller intends to market a property for sale, it is disastrous for the seller to have the property tied up as part of an ongoing attempt by the buyer to recover an EMD in a lawsuit.

Here, it is in the best interest of the seller to cancel the underlying purchase agreement and escrow at the same time.

In a declining real estate market, a seller’s losses include the difference between the agreed-upon price and the lower value of the property at the time of the buyer’s breach. In times of recession, this often exceeds the amount of the buyer’s deposit, however the amount of the deposit does limit the amount the seller can recover from the buyer.

Real estate problem? We invite you to call us for a free evaluation of it, and to see if the economics of our help justifies our working together.



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