Legally speaking: Does no earnest money = no contract?
On February 16, 2016
By Peg Ritenour, OAR Vice President of Legal Services/Administration
The OAR Legal Assistance Hotline receives an array of real estate-related legal questions — including license law issues, disclosure, contract law, ethics and commission problems, among others. In an effort to help you work within the law, our “Legally Speaking” series spotlights some of the timely questions that are being asked by REALTORS. The following addresses whether failure to deposit earnest money results in a contract becoming void…
Q: I represent a seller who accepted an offer to purchase from a buyer 10 days ago. Under the terms of the purchase contract the buyer was to provide a $1,000 earnest money deposit within five days after acceptance. I just emailed the buyer’s agent to confirm that the buyer has done that, and was informed that the buyer has not brought in the check yet. My seller is upset and has asked me if the contract is void because the buyer failed to bring in the earnest money within the five days required by contract. I know earnest money isn’t required to have a binding contract but isn’t the buyer in breach the contract? What should I tell my seller?
A: Real estate agents and brokers are often asked for legal opinions that involve an interpretation of a purchase contract and the obligations of the parties. And while REALTORS want to appear knowledgeable and to assist their client, the best thing to do in the situation described above is to explain to the seller that you are not an attorney and they should seek legal advice.
At first impression this may seem like a straightforward question. However before a legal determination can be made as to whether the seller can terminate the purchase contract due to the buyer’s failure to deliver the earnest money deposit, several questions must be asked. First, did the purchase contract address the failure of the buyer to comply with the deadline? Does it state that this is a basis for the seller to terminate the contract?
Secondly, does the contract provide that time is of the essence? And does such language apply to the five day time period to provide the earnest money? Absent “time is of the essence” language, some courts do not consider such deadlines to be mandatory. Thus, if time wasn’t of the essence and the buyer brought in the earnest money shortly after you talked to the buyer’s agent, it is possible that a court may not consider the delay to be a breach of contract.
Another factor that could be relevant is whether the seller notified the buyer that he considered the failure to deliver the earnest money to constitute a material breach of the contract and how soon that was done. For example, if the seller found out the earnest money hadn’t been deposited but did nothing for two weeks or only after receiving a better offer, a judge may find that the five day requirement was waived by the seller, especially if the earnest money had been deposited by that time. On the other hand, if time was of the essence and the seller notified the buyer that he considered this to be a breach of contract immediately upon learning that the deposit was not made, a judge may be much more inclined to enforce that provision.
So you can see that this is not a simple yes or no question. And while you may be tempted to proffer an opinion, doing so could result in you being found to have engaged in the unauthorized practice of law. For this reason it is very important for REALTORS to avoid giving definitive answers or opinions on matters that involve a legal determination. And moreover, you should refrain from doing so to protect yourself from potential liability in case your answer or advice turns out to be wrong and exposes the seller to litigation or damages.