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Does a seller of a real property have to return the deposit and what to do if they refuse

seller refusing to return deposit

You signed a contract to buy real estate and could not go through with the purchase. You asked the seller to return the deposit and they are refusing. In this situation, it is important for you as as buyer to know your legal rights and your options.

The buyer needs a valid reason to back out of the contract

A valid reason to back out of the contract will be spelled out in the contract itself. It could include things such as structural problems with the property or priblems with the seller’s title to the property.

If you as a buyer did have a valid reason ot back out of the contract, then the seller would have to return the deposit to you. If you had a valid reason to back out of the contract and the seller is refusing to return the depsosit, then you may have to go to litigation, using the court to force the seller to return the deposit.

Believe it or not, there are situations where the seller can just keep the deposit. For most buyers, this comes as a surprise. But this is the sad truth. The seller only has to return a deposit if the buyer had a legally valid reason to back out of the contract.

When the seller is willing and able to perform his obligations to sell and the purchaser defaults without any valid reason, the seller is entitled to keep the earnest money.

The general rule is enunciated in Lawrence v Miller, 86 N.Y. 131 (1981), where the seller is entitled to the earnest money deposit in case the buyer defaults without valid reason and the seller is willing and able to perform his obligations under the contract. The Court held that it would be “ill doctrine” to allow the purchaser, who is a defaulting party, to maintain a cause of action when it was the purchaser, himself, who violated the agreement.

What is a valid reason to back out of a real estate contract

A valid reason to back out of the real estate contract is spelled out in the contract and/or specified by the real estate law. Backing out because you’re allowed by the contract is considered “backing out due to a contingency,” in which case the seller would have to return the deposit. The following contingencies are usually specified in the real estate contract:

  • an inspection revealed a structural or other problem with the property
  • a title search revealed a problem with the title
  • an appraisal came out lower than the indicated price

What would not be a valid reason to back out of the contract

What would not be a valid reason to back out of the contract would probably be:

  • you found a better deal
  • prices went down
  • you changed your mind
  • you want to live in a different neighborhood
  • school rating got worse
  • your job situation changed

The buyer needs to follow the correct procedure in order to get the deposit back

If the buyer had a contractual right to cancel the real estate contract but did not follow the procedure stated in the contract for cancelling, the seller will also be entitled to the earnest money.

In the case of Maxton Builders v. Galbo, 68 N.Y.2d 373 (1986), the purchaser inserted a handwritten rider in the real estate contract that said, “”[i]f real estate taxes are in excess of $3,500 based on a full assessment of house sold for $210,000.00, buyer shall have the right to cancel this contract upon written notice to the seller within three days of date and escrow funds to be returned.” The purchaser exercised his contractual right to sell because the assessed real estate taxes were higher than $3,500 and requested the seller for the return of the earnest money deposit. However, the Court denied the purchaser’s right to the earnest money deposit because the purchaser did not provide the seller with written notice to cancel within the three-day period written in the contract.

The importance of the financing contingency clause on return of deposit

If the contract did not provide for a financing contingency (i.e., the entitlement of the purchaser to the earnest money deposit in case the purchaser was not able to secure financing), the seller is entitled to the earnest money deposit, even if such financing contingency provision is a regular provision in most real estate contracts.

In Abart Holdings LLC v. Bayou Properties, Index No. 600258/2009, a New York trial court denied the purchaser’s request to return the earnest money deposit, even if purchaser was not able to secure financing. In this case, the real estate contract between the purchaser and seller did not clearly and concisely provide for a financing contingency. Although financing contingencies have been a regular provision in real estate contracts, the real estate contract in this case did not provide for any financing contingency as a condition precedent for closing. Due to the absence of such language, the Court denied the purchaser’s claim for a return of his earnest money deposit.

Given the cases provided above, the seller’s entitlement to the earnest money deposit has been established in Lawrence v. Miller. If the buyer seeks to cancel the contract because of defect or any other reason that is provided under the contract, the buyer needs to exercise this right to cancel strictly in accordance with the contract provisions. Failure to timely exercise this right to cancel can lead to the seller’s entitlement of the earnest money deposit. (Maxton Builders v .Galbo). For example, if the contract did not provide for a financing contingency, purchaser cannot demand financing contingency as a condition precedent for closing.

Notice of pendency or lis pendens

If the seller is refusing to return the deposit and has re-listed the property and is trying to sell it to a different buyer, you as a buyer may want to consider your options to file a lawsuit against the seller and to place a lis pendens or notice of pendency of a lawsuit on the property, so as to alert any future buyer about the dispute. Be careful to not do this in a frivolous way or to delay or prevent a valid sale to a new buyer, especially if you are no longer interested in the property.

Earnest money is a deposit made by the purchaser to the seller, generally 10% of the total contract price, to reserve the property and ensure that the seller would not offer the property for sale to other third parties anymore. It’s a promise to the seller to buy the property. If you’re buying a house, a building or any other kind of property, it is important to establish a legally valid reason and follow procedure in order to maximize your chances of recovering the deposit from the seller.

Contact an attorney

If you are a buyer and you need to cancel your contract, you need to consult with a lawyer immediately so you can timely exercise your rights to get back the deposit. The first instance would be the attorney who is representing you in the real estate transaction. If that does not work and you need to hire a litigation attorney to commense a lawsuit to recover the deposit, we at the Law Offices of Albert Goodwin, are here for you. You can call us at 718-509-9774 or email at attorneyalbertgoodwin@gmail.com.