The Battle Over Earnest Money

An earnest money deposit is a deposit paid to demonstrate commitment to bind a contract, made by a buyer showing the buyer’s good faith in a real estate transaction. What happens when a dispute arises over the disbursement of earnest money deposit when the real estate transaction goes sour? The parties of the transaction and their respective brokers could be caught in the middle and face civil liability and disciplinary actions.
 
Dispute Resolution
 

The most common claim that the buyers and the sellers make against each other is for the release of the “earnest money” deposit. Generally, the buyers who are canceling the transaction use a contingency clause in the contract that allows them to cancel under certain circumstances. However, once those contingencies are either removed or released, the buyers’ obligation becomes unconditional. Thus when the buyer is in wrongful breach, the seller is generally entitled to keep the earnest money deposit as liquidated damages – assuming the liquidated damages provision is properly executed. 
 
Even though the seller might have a legitimate reason and right to keep the buyer's earnest money deposit in the event the buyer wrongfully breaches, exercising that right might not be in the seller's best interest. Again, let’s assume the buyer has released all of the contingencies, and right before closing, the buyer backs out and demands the return of earnest money deposit. Of course, the seller may have an adequate claim against the buyer and sue for damages. However, the seller could be facing long and cumbersome civil litigation, and might be prohibited from selling the property to another buyer while the dispute is in question.  Remaining in contract with the buyer could tie the seller’s hands for many years and might not be worth the seller’s pursuit.
 
Duty Owed to the Other Party

A realtor has no duty to get involved in a dispute over the earnest money, other than to assist with the preparation of the release of earnest money documents and possibly to become a witness if the dispute ends up in court. Keep in mind that, although the agent or broker may represent only one party in the transaction and owes no duty in the in event of earnest money dispute, courts have found that you may nonetheless owe the other party a duty with respect to handling earnest money deposit. Always be extremely cautious when handling deposit funds and follow regulations as well as the language in the contracts. Brokers should also immediately disclose all material information concerning the deposit to individuals having an interest in the funds.