Buying or selling real estate in Florida often entails the inclusion of an “earnest” deposit, an agreed-upon amount usually placed in escrow by the buyer during the negotiating process as a sign of goodwill between the parties and an intention to complete the negotiations. Once the transaction closes successfully, the earnest deposit is often applied toward the purchase price and closing costs.
As part of the negotiating process, the buyer and seller should establish certain contingencies upon which the buyer can cancel the contract. Under these specified conditions, the deposit is refundable to the buyer. The typical examples of contingencies in residential contracts are appraisals, home inspections, or the issuance of loans. For example, if, during a home inspection, the buyer discovers a substantial repair issue – say, a roof leak – the buyer may be able to retrieve the deposit if the seller does not agree to fix the leak. For commercial contracts, buyers often offer all cash with no financing contingency but a stated due diligence period in which the buyer may cancel for any reason, including being unable to finance the transaction if they can’t obtain a loan.
Most contracts provide for a liquidated damage provision that allows the seller to keep the deposit if the buyer defaults or fails to perform its obligations to close. A last-minute withdrawal from the contract, for example, would favor the seller.
To complicate matters further, since the earnest deposit is held in escrow – often by a third party such as a title company – the buyer and seller must come to an agreement in order to allow the escrow agent to release the monies. Escrow agents must fulfill their fiduciary duties or risk liability for the amount owed. Therefore, the escrow agent will retain the deposit until the parties hash out their differences, whether through mediation, litigation, or other means. Only then will the money be released to the appropriate party.
The bottom line is to make sure your contract states clearly how the earnest deposit is to be handled and under what circumstances it is to be returned to the buyer or retained by the seller. Having everyone on the same page is the best way to ensure a smooth negotiation and closing. At Kleiner Law Group, we are here to help. Contact us today!
