Earnest Money Deposit • Expedited Resolution Program

When a buyer makes an offer to purchase real property, the written agreement between the buyer and seller most often contains a term that requires the buyer to deposit funds, known as an earnest money deposit, into an escrow typically within 72 hours of the acceptance of the offer. Once these funds are deposited with an escrow company, they cannot be released to either party without an agreement by the parties to do so or by court order.

In residential purchase agreements such as the California Association of Realtor’s purchase agreement, buyers typically deposit up to three percent of the purchase price as an earnest money deposit. Sometimes a buyer cancels the purchase agreement before they have deposited the earnest money deposit with the escrow company, however, the seller may still assert a claim for those funds if the seller alleges that the buyer breached the agreement.

The most common scenario occurs when a buyer makes an offer with no contingencies such as no loan contingency, no appraisal contingency and no inspection contingency. When a buyer then cancels a contract without contingencies, the seller may claim that the earnest money deposit should be released in its entirety by the escrow company directly to the seller as “liquidated damages.”

Liquidated damages generally means a set amount of damages to compensate a seller for the alleged breach. Purchase agreements may contain a liquidated damages clause that caps the amount of damages a seller can collect against the buyer. In residential transactions, the liquidated damages is typically capped at 3% of the purchase price.

Buyers who have no contingencies cancel purchase agreements for a host of reasons, some of which may provide them with a defense to losing their entire deposit to a seller. Sometimes buyers learn material undisclosed facts about a property after they enter into contract. Certain laws may provide relief to a buyer who may have breached the purchase agreement. The onus however is often on the buyer to show that they had a lawful reason to cancel a contingency-free purchase agreement.

Most purchase agreements contain a term that requires the parties to the agreement to attend mediation before bringing either a civil action or before filing an arbitration claim. This obligation applies to earnest money deposit disputes. A party may however file a small claims action without first attending mediation however most earnest money deposits are in excess of the amount a small claims court can award a party.

If the parties simply bicker back and forth about their deposit without making headway in resolving the distribution of it, eventually, the escrow company will be forced to “interplead” the funds to a court. An escrow company cannot hold onto a deposit into perpetuity so if the parties do not enter into an agreement regarding how to distribute the deposit or a court order is not obtained, the escrow company will hire an attorney to file a motion to deposit the funds with a court. The cost of the attorney will be taken directly out of the deposit. The parties will then be forced to engage in a court process or an arbitration to obtain a ruling about the distribution of the funds. Mediation can short cut and avoid a lengthy and costly court battle.

Mediation is an efficient and cost effective method of resolving an earnest money deposit dispute between a buyer and a seller. Parties can appear at mediation in pro per (representing themselves) or can be represented by an attorney.

The mediator will work with the parties to understand the dispute and will facilitate a resolution. When the parties agree, the mediator will supply a settlement agreement for the parties to sign. That agreement is legally binding and can be enforced in a court of law if one party breaches by, for example, failing or refusing to execute further escrow instructions releasing the deposit or by failing to pay the seller if the buyer had not yet deposited the earnest money deposit into escrow.