The Contingency That Never Quite Ended
A standard form purchase contract sets a $20,000 earnest money deposit, due 'within 3 business days after acceptance,' held by the listing broker in a trust account. It includes a financing contingency requiring the buyer to apply within 5 days and obtain a written loan commitment by day 30, and an inspection contingency allowing the buyer to terminate 'for any reason' by giving written notice within 10 days. The contract says time is of the essence. The buyer applies on day 6, gets an inspection on day 12, and on day 14 emails the agent: 'The roof is worse than I thought - I'm probably out.' The seller does not respond and later claims the buyer is bound. The buyer never deposited the earnest money.
1. Did the buyer validly terminate? Analyze each contingency and the effect of the late application and late notice.
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Inspection contingency: The contract required written notice within 10 days. An email saying 'I'm probably out' on day 14 is (a) late and (b) equivocal. With time of the essence, a missed deadline extinguishes the right to terminate on inspection grounds unless the seller waives or extends it. 'Probably out' is not an unequivocal exercise of the right even if timely.
Financing contingency: The buyer applied on day 6, one day after the 5-day deadline. That is a breach of a covenant, though courts often ask whether the delay was material and whether the seller was prejudiced. The 30-day commitment deadline had not yet arrived, so the financing contingency was still open on day 14 - the buyer could not yet rely on it to terminate.
Earnest money: Failure to deposit within 3 business days is a separate breach. Many contracts make the deposit a condition of the seller's performance; a seller may treat non-deposit as a default but must typically give notice and an opportunity to cure.
Conclusion: the buyer did not validly terminate on day 14. The buyer should deliver an unequivocal written termination immediately if still within an extension, or negotiate a mutual release; otherwise the seller may claim the deposit - but there is no deposit to forfeit, which weakens the seller's remedy and may expose the buyer to actual damages.
2. What should the listing broker do about the undeposited funds, and what is the broker's exposure?
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The listing broker is named as escrow holder. Once the contract is accepted, the broker has a duty to promptly demand and account for the deposit; holding nothing while telling the seller the buyer is 'in contract' is a trust-account and recordkeeping problem in most states. The broker should:
- Send written notice to the buyer demanding the deposit and stating the cure period.
- Notify the seller in writing that funds were never received.
- Document everything in the transaction file.
Exposure: state licensing rules require brokers to deposit earnest money promptly upon receipt, keep it in a trust account, and never commingle. A broker who fails to collect or account for a deposit can face license discipline and civil liability to the seller for misrepresenting that funds were secured. The broker should not release any funds (there are none) and should not advise either party on entitlement - that is a legal question for the parties or a court. If the buyer never pays, the broker's file should reflect the demand and the seller's instructions.