Friday, July 26, 2013

BREAKING UP IS HARD TO DO – WHEN THE BUYER’S BREACH RESULTS IN LOSS OF THE EARNEST MONEY DEPOSIT (OR MUCH MORE)

Few buyers enter into a real estate contract expecting that they will be unable to close on the purchase.  Sometimes, however, bad or unexpected things happen, the closing does not occur as planned and an upset seller will make a claim for the buyer’s earnest money deposit. 

Although most buyers believe that their monetary exposure in the event they breach the contract and fail to close on their purchase is limited to the amount of their earnest money deposit, this is not the case.  The GCAAR Regional Sales Contract provides that the seller may, at its option, accept the earnest money deposit as full and “liquidated damages” for the breach.  If this election is made, the seller will accept the deposit as full payment for its damages and the buyer will have no further liability to the seller.  However, a seller is not required to accept the deposit as liquidated damages and may pursue the buyer for all its damages, an amount that could substantially exceed the amount of the deposit.  For example, if an earnest money deposit was $5,000 and the seller incurred $10,000 in damages as a result of the buyer's  breach, the buyer could be liable for the whole $10,000, plus the seller’s attorneys’ fees (and his or her own attorney’s fees, as well).

A prudent buyer should consider amending the default provision of the real estate contract to provide that, in the event of a breach, the seller shall accept the earnest money deposit as its liquidated damages without exception.  Such an amendment would establish with certainty the maximum liability the buyer would face if he or she breached the contract and failed to close.  Otherwise, potential damages are unknown at the time of the contract and a buyer could face significant liability in the event of a breach.
If you have any questions regarding real estate contract issues, please feel free to contact me at (301) 444-4664 or via e-mail at bruce@sternlegal.net.

Bruce L. Stern, Esq.

No comments:

Post a Comment