The Best of the Legal Hotline: Earnest Money Issues

 Debbi Conrad & Tracy Rucka  |    June 08, 2005

The following questions about earnest money were recently asked of the hotline.

Q. A buyer does not want to put down any earnest money on a property that is listed. Would this be a legally binding contract? 

A. An offer to purchase does not need earnest money to become a binding contract provided that this is acceptable to the seller.

Q. The transaction was scheduled to close in March, but the seller chose not to provide clear title. The listing broker cannot reach the seller because the seller has no forwarding address and may be in jail in Illinois. The buyer would like the earnest money back. Can the earnest money be returned without the seller’s signature on a cancellation agreement and mutual release (CAMR)? 

A. While it is natural to want to help the side that ‚Äúdeserves‚ÄĚ it, the disbursement of earnest money and other funds from a real estate trust account is controlled by the rules found in Wis. Admin. Code ¬ß RL 18.09(1) and (2) and summarized in the Residential Offer to Purchase. The rules give the parties involved a fair chance to make a claim, and do not give the broker the right to decide who deserves to receive funds.

Pursuant to lines 247-271 of the WB-11 Residential Offer to Purchase, the listing broker does nothing with the earnest money for 60 days after the scheduled closing date unless the parties reach a written agreement for the disbursement of the earnest money. The listing broker may wish to write a memorandum or letter to the buyer and seller and their respective attorneys, if any, pointing out lines 247-271 and explaining that this is how the earnest money disbursement must be handled. It is then up to the parties to work out their differences by negotiation or by going to small claims court.

After the 60 days has past, the listing broker may choose to initiate a small claims action or seek an impartial attorney’s written opinion as to who should receive the earnest money. The listing broker may deduct up to $250 from the earnest money for the legal fees involved in either of these alternatives. The listing broker also may continue to do nothing and allow the parties to resolve the earnest money dispute themselves or through their attorneys.

The broker may wish to determine whether the seller is in jail. If so, he may be able to arrange to have a new CAMR delivered to the seller for his consideration.

Q. When the selling agent received the buyer’s earnest money check, it was inadvertently made out to the selling broker’s trust account instead of the listing broker’s trust account. Can the selling broker write a check from his trust account to the listing broker’s trust account to transfer the money? 

Wis. Admin. Code § RL 18.08 reads, “If a transaction involves a cooperating broker and the parties have not agreed otherwise, the cooperating broker shall transfer any trust funds received to the listing broker or other person designated by the parties to hold the trust funds within 24 hours of the deadline stated in the offer . . . for transfer of the funds. If the trust funds are received in the form of a personal check, share draft or draft, the cooperating broker may withhold transfer of the payment pending evidence of clearance from the payer’s depository institution.

In any case, the cooperating broker shall transfer the trust funds to the listing broker within 30 days after receipt, unless the cooperating broker has obtained definitive information from the depository institution that the personal check, share draft or draft has not cleared.‚ÄĚ The selling office may wish to make a photocopy of the check and forward it to the listing office along with an explanation of what has happened and hope that the seller does not deem this to be a breach of contract.

Q. After the home inspection, the buyer sent the seller a notice reporting major defects and advising that the buyer was withdrawing her offer. The buyer did not deliver the earnest money because of the inspection results. According to the home inspection contingency, the seller had the right to cure. Do the parties need a CAMR since there was no earnest money? 

Once an offer to purchase is accepted the parties have a binding contract, regardless of whether the buyer pays the earnest money, and the buyer cannot unilaterally withdraw the offer. Failure to pay the earnest money does not release or relieve the buyer from her contractual obligations. A buyer failing to pay earnest money is in breach of contract, and it is up to the seller, in his or her discretion, to determine whether this is a default that is sufficiently material to form the basis for a seller notice of termination.

In addition, the seller has the right to cure, so the buyer cannot unilaterally withdraw or terminate the offer to purchase based upon the results of the inspection. The buyer may deliver a notice of defects and a copy of the inspection report, thereby triggering the seller’s election to cure the defects or to allow the offer to purchase to become null and void.

If the parties agree to release all rights and obligations under the contract, a CAMR should be prepared. The parties may first wish to review the contract default provisions and confer with their respective attorneys regarding their legal rights.

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