Disputes of Residential Earnest Money
What is Earnest Money?
Simply put, Earnest Money is a payment made to the Seller from the Buyer. It represents that the Buyer is serious about purchasing the property and is an assurance to the Seller. Questions revolving around the refund of Earnest Money are some of the most common disputes Hohenheim Legal deals with. Earnest Money has a few key characteristics including: (1) the earnest money is generally deposited with a title company (or other Escrow Agent), (2) the expenses of the parties incurring during the contract cannot be paid from the earnest money, and (3) Oklahoma provides for a liberal refunding policy concerning Earnest Money.
(A) Earnest Money and Escrow Agents:
As provided on page one of the OREC contract, the Earnest Money should be deposited with an Escrow Agent. This is almost always the closing company (earnest money form and receipt found here). If a dispute arises, the title company retains the earnest money until either: (1) A written release is signed by both parties, (2) an agreement is reached in mediation, or (3) a lawsuit is filed. The most common is an agreement is reached between the parties before mediation or any legal action. In this case, the release form found here is used. Note that this form also releases the contract and releases both parties from “all claims, demands, liabilities, and loses.”
It is important to note that failure to provide Earnest Money can result in the termination of the contract.
(B) Expenses of the Parties Cannot be Paid from the Earnest Money
A common issue that Hohenheim has negotiated is the Seller wishing to be reimbursed for their expenses from the Buyer’s earnest money. However, as a general rule, this cannot be done. Specifically, the OREC contract states that “Buyer and Seller agree that any expenses, incurred on their behalf, shall be paid by the Party incurring such expenses and shall not be paid from the Earnest Money.”
One recent example was a Seller performing repairs that the Buyer had verbally requested. NEVER DO THIS. If the Buyer has requested repairs, make sure any agreement thereof is written. Under the Treatment, Repairs, and Replacements (TRR) provision found on page 3, the Buyer waives their right to refund earnest money only if a written repair agreement is reached between the parties. Otherwise, if the results of the Buyer’s inspections are unsatisfactory, IN THE SOLE OPINION OF THE BUYER, they may terminate the contract and receive a refund of the Earnest Money. Therefore, if inspections are completed and the Buyer backs out of the contract for whatever reason, the Earnest Money must be refunded.
(C) Situations where Oklahoma Allows the Refund of Earnest Money.
Earnest Money can be refunded in a myriad of ways. The most common is if the results of the Buyer’s inspections are unsatisfactory. No questions asked and in the sole opinion of the Buyer, they may terminate the contract and receive a refund of the Earnest Money. Therefore, if inspections are completed and the Buyer backs out of the contract for whatever reason, the Earnest Money must be refunded. However! If a TRR form is submitted and a written agreement as to the repairs is reached, the Buyer waives their right to terminate and refund the earnest money under unsatisfactory inspections. Buyers and Sellers should make sure any agreements as to repairs are recorded in writing to ensure both parties know what repairs are expected. The TRR form can be found here.
The next method of refunding earnest money is a significant delay in closing. Specifically, a refund is allowed if Title Requirements are not cured within 30 days or otherwise specified. Title Requirements are material issues with legal ownership of the property and they can vary widely. Common requirements which do not generally result in delays include HOA fees and other liens, payment of Ad Valorem Taxes, or unreleased Mortgages. However, requirements that cause serious delays (3+ months) include probate or quiet title actions and this OREC provision considers these. After all, if there is a fundamental issue in ownership that might cause a delay of many months, the Buyer should not be under an obligation to wait for a title to be cured. Therefore, unless otherwise agreed, the Seller has 30 days to delay closing to cure title defects.
The final situation allowing the refund of earnest money is if the Seller fails to perform their obligations under the contract. This includes a failure to convey title (refusal to sign at closing) or a refusal to complete the repairs agreed upon. Earnest Money should be refunded if the Seller does not close. That simply makes sense. However, this situation also involved potential breach of contract claims as well.
Taking all of these situations into account, Oklahoma has quite a liberal policy when it comes to returning earnest money. If you have questions concerning this or any other legal topic, please do not hesitate to contact us. We offer free telephone consultations and will be happy to help.