September 2, 2014
Accepting a New Contract During an Earnest Money Deposit Dispute
On July 31, 2014, I posted about a recent Fairfax Circuit Court opinion concerning Earnest Money Deposits (“EMD’s”). The seller, Sagatov Builders, LLC, sued buyer Christian Hunt. Mr. Hunt had entered into a contract and later failed to make the EMD or complete closing. The Court refused to allow the seller to sue the buyer for the unpaid deposit amount, finding it to constitute an unenforceable penalty.
Recently, an anonymous visitor typed a question into the search feature of this blog, rephrased as follows: “If there is a pending dispute over an EMD, can the seller accept another contract on the same property?” In other words, what are the risks of having two unreleased contracts simultaneously on the same property? In the Sagatov case, the seller used a marked-up, outdated realtor association form as a template for a transaction conducted apparently without brokers. Since the buyer never made the EMD, that wasn’t a classic earnest money dispute. The visitor’s question intriguingly takes a step back and asks how the EMD dispute implicates fundamental contract issues.
Today’s post explores this visitor’s question. This reminds me of a personal experience I had over a year ago. My wife (then fiancée) and I were under contract to purchase a home in Fairfax County, Virginia. We made the EMD. Our home inspector discovered a below-grade crawl space suffering from significant water intrusion problems. Our agent provided our home inspection report to the seller along with a request for release of the EMD. We resolved the dispute by using the home inspection contingency to get out of the contract. We were able to get our EMD back without having to send lawyer letters or go to court. Once we decided to ask for the release, we didn’t care what the sellers did with the house once we moved on, so long as we weren’t involved. However, some buyers may attempt to tie up the disposition of the real estate in order to gain leverage in getting their EMD back. Buyers and sellers can disagree over whether a contingency is still available.
While the circumstances and wording of each contract dispute are different, this visitor’s question brings a few thoughts to mind:
- Conflict Avoidance. Sellers and their agents get their money by selling the house to a willing buyer, not by engaging in EMD disputes. If the buyer doesn’t want to go to closing, then there you are. Yes, the parties (and their agents) time is lost in a failed deal. There is a time value to money. However, usually it is in their best interests to undo the deal and move on. EMD disputes that can’t be amicably resolved end up in Court, possibly going to trial. Some cases continue for months or even years.
- Role of EMD. After the contract and deposit are made, any dispute between the buyer, seller and/or their agents implicates the EMD as a potential remedy for a default. The timing and circumstances of the underlying default are usually determinative.
- Materiality of Buyer’s Default. A seller cannot take a deposit, repudiate a signed contract on a flimsy pretense, pocket the EMD and then move on to the next potential purchaser.
- Available Remedies. The judge will seek to interpret facts of the case according to the terms of the contract. An example of the language of a contract that may be used in Virginia is available here. The Court can do one of any number of things, including (a) forcing an unwilling party to go forward with the sale, (b) undoing the deal and returning the parties to the original positions or (c) awarding money damages as compensation.
- Waiver Issues. Usually, buyers don’t back out unless they discover some defect or simply can’t close due to circumstances, such as not having the money. If the buyer demands a release of a contract and refuses to go to closing, it will be hard for them to expect the seller to keep the property off the market. Likewise, if a seller accepts a new contract, then the seller cannot reasonably expect the buyer to purchase the house.
- Mitigation of Loss. Under some circumstances, the seller may be under a duty to find a replacement buyer. For example, the seller may claim the deposit on the premise that changing market conditions will result in a lower subsequent sale. Or, the seller may claim damages on the theory that it will suffer losses related to having to keep the property on the market. It is unreasonable for a seller to incur avoidable losses and then seek compensation for them from the backing out buyer.
- Failure to Timely Close. If the parties are close to closing, the seller may consider waiting until the closing date passes. The buyer’s failure to prepare for and go to closing prejudices expectations on their part that the property be kept off the market.
- Professional Regulation. The Real Estate Board regulates the conduct of real estate licensees. Agents may have professional duties under their own agreements with the parties and the particular circumstances of the dispute.
In the event that parties to a real estate sales contract cannot amicably resolve disputes over the disposition of the property or the EMD, they are well advised to contact a qualified attorney for counsel and representation.
I took the featured photograph in Shenandoah County, Virginia. It is just for fun and does not depict any of the properties discussed on this blog.