Late Disclosure, an Expired Contingency, and a Deposit in Limbo
On January 10, buyers sign a Michigan purchase agreement for $265,000 with $5,000 earnest money, deposited by the listing broker with a title company. The inspection contingency lets the buyers terminate for any reason by 5:00 p.m. on January 18. Financing must be approved by January 30. The sellers, who bought the house as a rental and never lived in it, deliver the seller's disclosure statement on January 20 at 2:00 p.m. On January 21 an inspector reports a cracked foundation wall with active seepage. At 9:00 a.m. on January 22 the buyers' agent emails the listing agent that the buyers terminate and want the $5,000 back. The sellers refuse to sign a release, arguing the inspection deadline passed and that disclosure was not required because they never occupied the house.
1. Is the buyers' termination timely? Identify every available basis and compute the deadlines.
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Basis 1 - inspection contingency: gone. The right to terminate for any reason expired at 5:00 p.m. January 18. The January 22 notice is four days late, and discovery of a defect does not revive an expired contingency.
Basis 2 - late seller's disclosure: valid. For a transfer of residential property of one to four units, if the written seller's disclosure statement is delivered after the purchase agreement is signed, the buyer has 72 hours after receipt to rescind by written notice. Delivery was January 20 at 2:00 p.m., so the deadline is January 23 at 2:00 p.m. The January 22, 9:00 a.m. email - written and delivered to the listing agent - is within the window.
The sellers' 'we never lived there' argument fails. Non-occupancy is not an exemption from delivering the disclosure statement. A seller discloses what it actually knows and marks items unknown where it has no knowledge; a landlord who has never occupied still must deliver the form. Transfers that are exempt are things like certain foreclosures, gifts, and transfers between co-owners - not 'I was an absentee landlord.'
Result: the termination is timely and effective on the disclosure basis. The buyers are entitled to return of the earnest money.
2. The sellers refuse to sign a release. What may the listing broker do with the $5,000, and what must the broker not do?
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The broker is a stakeholder, not a judge. The earnest money is held in trust for whichever party is entitled to it. The broker does not decide who wins the argument.
Permitted steps:
- Give written notice to both parties that a dispute exists and that no disbursement will occur.
- Keep the funds in the designated trust/escrow account, fully documented, with the deposit receipt and the agreement.
- Offer the dispute-resolution route the contract and the brokerage agreement specify - mediation or arbitration of the earnest money dispute.
- If the parties will not agree, interplead the funds with the court and let a judge decide; the broker then steps out of the middle.
- Produce the file on request to either party or to the licensing agency.
Prohibited:
- Releasing the money to the buyers just because their termination looks valid to the broker.
- Releasing it to the sellers as a lever to keep the deal alive.
- Applying it toward the commission or any brokerage fee.
- Commingling it with operating funds or holding it past the period required by rule without a documented reason.
Practical note: a mutual release is fastest, but it requires both signatures; a broker who disburses without one is exposed to a conversion claim from the losing side.
3. Closing is reset to March 14, 2025. The 2025 property taxes are $3,285 and the buyers will pay both the summer and winter bills. Compute the proration on a 365-day basis and state who is debited.
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Direction first. Michigan taxes are billed and paid after the fiscal year they cover begins, and here the buyer will pay the entire 2025 bill. The seller therefore owes the buyer for the portion of the year the seller owned the property. Debit the seller, credit the buyer.
Day count. January 1 through March 14, 2025 (not a leap year):
- January 31
- February 28
- March 14
- Total = 73 days
Daily rate. $3,285 / 365 = $9.00 per day.
Proration. 73 days x $9.00 = $657.00, debited to the seller and credited to the buyer at closing.
Checks before you trust the number:
- Confirm the contract's proration convention (365-day vs. 12-month/30-day). A 12-month method would give $657.00 as well at 2.4 months x $273.75 - but the two methods diverge whenever the closing date is not on a month boundary, so use what the contract says.
- Confirm the $3,285 is the actual 2025 bill, not the prior year's, and check whether any summer installment has already been paid; if it has, refund the seller's paid portion instead of a straight credit.
- Special assessments and any delinquent prior-year taxes are handled separately and are generally the seller's responsibility.