Earnest Money Battles
These options may help buyers and sellers avoid lawsuits
over contract breaches.
Your client has put up $5,000 in earnest money and
entered into a contract to buy a house, but despite
her best efforts, she’s unable to secure financing.
Citing this loan contingency, she exercises her right
to terminate the contract and recoup her earnest
money, but the escrow agent can’t release the funds
because the seller—in clear violation of the terms
of the agreement—refuses to acknowledge contract
It would be nice to hope for a lightning bolt of
common sense to strike someone whenever he or she
so clearly breaches a contract, but the reality is that
contracts don’t enforce themselves and filing a lawsuit is an expensive, stressful, and uncertain action to
In many situations like this, although contract
termination is the sticking point, the main issue for
buyers is simply getting their earnest money back.
In light of this, here are a few things you can do to
help make earnest money less of an issue whenever a
seller refuses to acknowledge contract termination.
None of these alternatives are ideal, but they at least
give your buyer some options to consider other than
b Put up no earnest money. If your buyer puts
up no earnest money, the buyer and seller can’t
skirmish over it after contract termination. Contracts must be supported by consideration, but
the exchange of the buyer’s promise to buy for the
seller’s promise to sell is sufficient consideration
to create a contract. For buyers who have no tolerance for earnest money fights, the only option
is to have a contract without earnest money—
although there’s no guarantee the seller will agree
b Put up earnest money deposits in stages.
This is slightly more attractive to a seller. The
buyer could propose, for example, $1,000 of ear-
nest money payable upon execution of the con-
tract, with another $4,000 due after the buyer
clears her due diligence contingencies.
b ‘Sue or shut up’ clause. The agreement between the seller and the buyer could remove the
power of the seller’s refusal to authorize refund
of the earnest money by requiring the escrow
agent, or whoever is holding the funds, to refund
the earnest money to the buyer unless the seller
initiates a lawsuit to retrieve the earnest money
by a clear deadline. It is easy for a lazy seller to
decline to authorize the release of earnest money;
it requires tenacity for the seller to file a suit to
hold the money back. With a “sue or shut up”
clause, the seller’s refusal to authorize earnest
money release might only briefly tie up buyer
b ‘Loser pays’ contract clause. Occasionally,
a provision providing that the breaching party
pays the nonbreaching party’s attorney’s fees can
move the breaching party to honor the contract.
Yet a “loser pays” clause like this doesn’t move the
irrational or impoverished seller and sometimes
emboldens a party who doesn’t understand the
weakness of his position.
b A different earnest money holder. The buyer
might receive some comfort from having the
earnest money held by someone aligned with the
buyer. For example, the buyer’s agent, rather than
the listing broker, can hold the earnest money.
A friendly earnest money holder decreases the
chance of an inadvertent (or intentional) release
of the earnest money to the wrong side.
Again, contracts do not enforce themselves. Sometimes parties who are clearly in the right find they
have no choice but to file a lawsuit to enforce the
terms of the contract. By sharing some of these other
ideas with buyers, you might be able to take steps to
reduce some of the risks and avoid full-blown legal
fights over earnest money. W
Jonathan A. Goodman is a
shareholder in the law firm of
Frascona Joiner Goodman &
Greenstein, P.C., in Boulder,
Colo. His practice areas
include real estate, real
estate finance, and broker
representation. He can be