Best of the hotline: Who is entitled to the deposit money when an Agreement of Sale is terminated?

If an Agreement of Sale is terminated, who is entitled to the deposit money?

Facts: The buyer’s offer to purchase residential real estate was accepted by seller. It’s relatively a minor matter, but the seller is barely breaking even on the sale and will take no significant proceeds from settleme nt. The Agreement of Sale was written on the Standard Agreement of Sale of Residential Real Estate and is very clean. By that, I mean the buyer waived all inspection contingencies and elected only a mortgage contingency.

The buyer, with guidance from her buyer agent, made a mortgage application and moved to have the appraisal performed early in the process. Unfortunately, the lender demanded that the septic and electrical systems be "certified." The buyer anticipates that the certifications will fail, that the seller would not agree to pay for the lender-required repairs and she, the buyer, is without additional funds to make repairs before her purchase.

Q. If the buyer now elects to terminate the agreement of sale, is she entitled to a return of her deposit money?

A. Not really, but . . .

So, let me explain this equivocal answer. Paragraph 8(G) of the mortgage contingency clause provides what happens if the mortgage lender requires repairs to the property as a term of its commitment. When that occurs, the seller can agree to make the repairs or not. If the seller agrees to make the repairs, the buyer is obligated to proceed with the purchase. If the seller elects not to make the repairs, the buyer can make the repairs or terminate the agreement and be restored to her deposit money.

Our situation is different. Here the lender has not required that repairs be made, but merely that the property undergo further evaluation. The buyer is therefore not entitled to terminate the agreement at this time.

But why would the seller not agree to termination and return of the deposit money now? Let’s prognosticate what will likely happen. The seller is obligated to provide access to the inspectors pursuant to paragraph 12(A)(1) of the agreement (Buyer’s due diligence/inspections). The buyer will obtain the certifications at some cost. This all takes time and the property status in the multi-list will be "pending." Ultimately, when the lender’s inspector finds issues, (in our situation, the buyer anticipates that this is to be the case) then the lender will require that repairs be made. The seller has no additional funds to make these repairs and it is unlikely that seller’s lender will dig into its pocket. The buyer will reject the opportunity to undertake the repairs at her expense and then will terminate the agreement and be restored to her deposit money. So, if the buyer takes the long road, she will be able to put herself in a position where she is entitled to a return of her deposit, albeit sometime down the road and at a cost.

But why should the buyer take the long road and why is it not in the seller’s best interest to terminate the agreement now? Keep in mind that if the the buyer proceeds to obtain the certifications as required by the lender, there likely will be problems that have to be revealed on a seller disclosure presented to future prospective buyers. Who needs that?

Further, terminating the agreement at present makes the property immediately available to other would-be purchasers. Having the buyer go through the certification process, obtain a lender’s demand for repairs and then terminate, moves us much farther down the road, time-wise

Yes, our Standard Agreement provides formula for resolving most situations that arise between the signing of the agreement and settlement. Preprinted agreements, however, can never be as flexible or responsive to the issue as may be optimal in a given situation. Shortcutting the process and mutually agreeing upon a sensible resolution can be much more attractive to all sides of the transaction.

Copyright © James L. Goldsmith, Esquire, CALDWELL & KEARNS, P.C., 2014

All Rights Reserved

Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.realcompliance.com