The Following, Actual Legal Case (Just Recently Resolved) Illustrates Why RE/MAX Advantage

The following, actual legal case (just recently resolved) illustrates why RE/MAX Advantage emphasizes that (1) you should try to arrange for Advantage to hold Earnest Money Deposits if you can, and (2) you need to be very specific when you write contingencies into Additional Provisions. This was NOT a RE/MAX Advantage transaction and none of our people were involved.

Buyers entered into a Contract to buy property in Pueblo and made an earnest money deposit of $10,000. The Buyers’ broker included a clause in the Additional Provisions section that said the contract was “subject to” the sale of Buyers’ Colorado Springs residence. There was no mention in the section indicating what would happen if Buyers’ property didn’t sell, presumably because the broker believed it was understood. Ultimately, the Buyers’ property didn’t sell and the transaction did not close on the December 15 scheduled closing date. Sellers refused to sign a mutual release so the title company ( a big, well known one many of us use) refused to release the 10K.

More than a month later, Sellers (obviously without legal advice) filed a lawsuit in Pueblo County Small Claims Court against the Buyers for $7,500 of the earnest money deposit (small claims court has a jurisdictional limit of $7,500, you don’t have to be represented by a lawyer and procedural rules are greatly relaxed). In response, Buyers retained a particularly brilliant attorney who immediately filed a counterclaim for the entire $10,000 plus attorneys fees, court costs and other damages and removed the case from small claims court to county court (because the amount in question now exceeded the small claims court’s jurisdiction). Finally, after almost 5 months of delay, the Sellers capitulated, released the earnest money to the Buyers and paid their costs.

In this case the Sellers were, apparently, represented by an agent that made no effort to explain the terms of the contract to their understanding (if at all), and never explained the effect of a failure of the “subject to” clause on the earnest money. They assumed that, if the deal didn’t go through, they were, at least entitled to the “down payment.”

There’s no way we can prevent a vindictive Seller from filing a spurious lawsuit over the earnest money in a terminated contract. Their only punishment is to having to pay attorneys fees, court costs and damages when they lose. Nor can we prevent an unscrupulous (or stupid) agent from misrepresenting contractual terms to their client. But we can tighten up our own language.

We’ve all seen (or used) the following language in the Additional Provisions section of a contract: This contract is subject to the sale of Buyers’ residence located at ______.

Consider using, instead, this proposed language:

This contract is explicitly contingent upon the successful sale and closing of Buyers’ property located at ______. If Buyers’ property does not sell and close by said date, and that date is not extended by the written, mutual agreement of the parties, this contract shall terminate and any and all Earnest Money Deposit shall be returned to Buyers.

While the suggested language won’t necessarily preclude a misguided mediation or lawsuit, it will definitely give specific guidance to a mediator or court as to the intentions of the parties.