When a home sale falls through and the buyer’s earnest money deposit is being held in escrow, the parties’ respective rights to the escrowed funds will be determined by the terms of their purchase contract and Washington law. Disputes over what caused the contract to fall through can lead to litigation, although it is more common for them to be resolved out of court.

When making an offer to purchase a home, prospective buyers will frequently make what is known as an “earnest money deposit.” The purpose of the earnest money deposit is to show the seller that the buyer has a serious interest in the property, as the earnest money deposit is at risk for being forfeited under various circumstances.

But, rarely does the issue of the buyer forfeiting their earnest money deposit actually come up. Even when negotiations break down or the buyer exercises a contingency, the terms of the parties’ contract usually leave little room to question which party is entitled to collect the money out of escrow. So, when a dispute arises, the buyer, the seller, and their respective agents will typically need to seek advice from experienced real estate attorneys who can advise as to the parties’ respective rights.

Earnest Money Deposits as “Liquidated Damages”

In a typical scenario, the buyer’s earnest money deposit will come into play as potential “liquidated damages” for an alleged breach of the parties’ purchase agreement. The term “liquidated damages” refers to a predetermined amount that must be paid as compensation for a contractual party’s breach, and payment of this amount is generally the other party’s sole legal remedy. This is the case under the standard Washington residential home purchase and sale agreement with respect to various obligations of the buyer.

Section 64.04.005(1)of the Revised Code of Washington makes clear that this type of contractual provision is enforceable. However, it limits the amount of liquidated damages to five percent of the agreed price of the home:

“A provision in a written agreement for the purchase and sale of real estate which provides for liquidated damages or the forfeiture of an earnest money deposit to the seller as the seller’s sole and exclusive remedy if a party fails, without legal excuse, to complete the purchase, is valid and enforceable . . . . However, the amount of liquidated damages or amount of earnest money to be forfeited under this subsection may not exceed five percent of the purchase price.”

Seeking Payment of the Earnest Money Deposit from Escrow without Closing

If a seller seeks to collect the buyer’s earnest money deposit as liquidated damages, or if the buyer seeks to withdraw its deposit in connection with terminating the parties’ purchase and sale agreement, the relevant party must submit a written demand for payment to the escrow agent. Section 64.04.220(2)of the Revised Code of Washington states that, within 15 days of receiving a written demand, the escrow agent must either:

“(a) Notify all other parties to the transaction of the demand in writing and comply with the other requirements of this section;
“(b) release the earnest money to one or more of the parties; or
“(c) commence an interpleader action.”

If the escrow agent chooses to provide notice, the notice must include a copy of the written demand and inform the parties that: (a) they have 20 days to object to the release of the earnest money deposit; and, (b) if they fail to object within 20 days, then the deposit will be released pursuant to the written demand. Since the statute states that escrow agents cannot be held liable in earnest money disputes unless they simply choose to release the funds (option (b) in the list above), it is rare for escrowed funds to be released without further action on the part of one or more of the parties involved.

The third option – commencing an interpleader action – involves initiating a formal court proceeding in which the buyer and seller will present arguments over which party is entitled to the earnest money deposit. Even though the escrow agent (or “holder”) initiates the action, its role in the legal proceedings is minimal. Once the parties have negotiated a settlement or the court has issued a binding decision, then the escrow agent will release the deposit consistent with the terms of the parties’ settlement or the court’s order.

When Is an Earnest Money Deposit Subject to Being Forfeited?

So, when can a seller make a demand for the release of the buyer’s earnest money deposit without going to closing? While individual circumstances vary, examples of buyer contract breaches that can (under appropriate circumstances) entitle the seller of a residential property to demand the release of the buyer’s earnest money deposit from escrow include:

Failing to apply for financing in good faith by the deadline in the financing contingency;
Attempting to terminate the contract for a property defect that was apparent at the time the buyer signed the purchase and sale agreement;
Submitting a request for repairs and refusing to move forward with the purchase after the deadline in the inspection contingency; and,
Getting “cold feet” and attempting to back out of the transaction after all contingencies have lapsed.

Again, these are just examples. Even in these scenarios, there may be alternative solutions that can keep the buyer and the seller on the path toward a closing. In many cases, simply providing both parties with a clear explanation of their respective rights will help them make informed decisions about their next steps. If you have questions related to a residential propertyin the Tacoma, WA, area and would like to speak with an attorney, we invite you to contact us for a confidential consultation.

Speak with Experienced Attorneys at Blado Kiger Bolan P.S.

Our firm represents clients in escrow disputes in Tacoma, WA, and the surrounding areas. For legal advice custom-tailored to your residential real estate transaction, please call us today or contact us onlineto speak with one of our attorneys in confidence.