A Missed Inspection Deadline and an Undisclosed Water Claim
On March 1, buyer Lena and seller Omar sign a brokerage-drafted contract for a $420,000 house. Lena deposits $10,000 earnest money with the brokerage's escrow account. The contract gives Lena seven days after acceptance to inspect and terminate 'for any reason by written notice delivered to Seller,' and 21 days to obtain financing. Closing is set for April 15. Omar's seller disclosure states: 'Basement seeped in 2018; interior drain installed; no problems since.' On March 5 an inspector finds active mold, a cracked foundation wall, and evidence of a 2021 water claim. Lena's agent emails a notice of termination to the listing agent on March 9 and texts Lena's inspector's report; Omar refuses to sign a release. Omar says the disclosure was accurate because the drain fixed the 2018 issue and the 2021 claim was a different, repaired event.
1. Was Lena's March 9 notice effective to terminate under the inspection contingency? Identify the facts that help and hurt her position.
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Counting from March 1, the seven-day inspection period likely ended on March 8. The contract requires written notice delivered to Seller. Lena's email went to the listing agent on March 9 and the report was sent by text; that is late and may not satisfy the delivery method. Her purported termination is probably ineffective, and the contract remains in force unless she has an independent ground. Facts that help Lena: the inspector found active mold and a cracked foundation on March 5, which may be materially worse than the disclosed 2018 seepage; the 2021 water claim was never disclosed; and 'no problems since' may be a misleading half-truth. Facts that hurt her: the deadline is strict, the contract says 'for any reason,' and she missed it; email or text may not be 'written notice delivered to Seller' unless the contract authorizes electronic delivery. Lena should not rely on the late notice alone. She should immediately send a formal written notice to the seller and broker citing the newly discovered material defects and the omitted 2021 claim, and seek a mutual release or a repair credit. If the seller refuses, her remedies may include rescission for misrepresentation or breach of the disclosure statute, but litigation risk is real.
2. What is the likely disposition of the $10,000 earnest money, and what should the broker holding escrow do?
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The $10,000 is in the brokerage's escrow. The broker is a stakeholder, not a judge. It must not release the money to either party without a signed mutual release or a court order, or unless the state's escrow-dispute statute allows a specified procedure such as interpleader after notice. If the buyer's termination was late, the seller will claim the buyer defaulted and demand liquidated damages. The contract must expressly make the earnest money liquidated damages, and the amount must be a reasonable forecast of loss, not a penalty. The seller's failure to disclose the 2021 claim and the active mold gives the buyer a competing claim for return and possibly damages. The broker should send both parties a written escrow dispute notice, keep the funds in trust, preserve the emails and texts, and follow state licensing rules on escrow. Practically, the parties may settle by splitting the deposit or applying part to repairs. The broker should not take sides or delay indefinitely; unresolved escrow can trigger a license complaint.
3. Omar's 2021 water claim was not disclosed. Analyze the disclosure obligations of Omar and the listing agent, and Lena's options.
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Omar must disclose known material defects and prior water intrusion, repairs, and insurance claims if state law requires. Saying 'basement seeped in 2018; drain installed; no problems since' while omitting a 2021 water claim and active mold is at least incomplete and potentially a misrepresentation. The listing agent has an independent duty not to conceal known material facts and to avoid false statements. The agent should have asked about the 2021 claim, reviewed the disclosure, and corrected it in writing. The agent's duty of loyalty to Omar does not allow helping him conceal defects. Lena may have a claim for rescission, repair costs, or damages if she justifiably relied on the disclosure. The brokerage should advise Omar to amend the disclosure immediately, preserve the insurance records, and consider a repair credit or price reduction. If the deal closes without correction, the agent's license and the brokerage's errors-and-omissions exposure increase. Lena should obtain a mold and structural inspection and put all demands in writing.