Contingency Deadlines and Earnest Money
A Tennessee residential resale contract is accepted May 1. Price is $285,000; earnest money is $5,000 held by the listing broker. Financing contingency: buyer applies within 5 days and obtains loan commitment by June 1; if buyer cannot obtain commitment, buyer may terminate by written notice “before June 1” and earnest money is refunded. Inspection contingency: buyer may terminate for any reason by written notice within 10 days after acceptance. Buyer applies May 3. Inspection is May 8. On May 20 buyer emails the listing broker: “I terminate based on inspection.” Seller refuses, saying it is too late. On June 3 buyer also emails: “My loan was denied.” Seller demands the earnest money. The contract says time is of the essence and notice must be in writing to the listing broker.
1. Was the May 20 inspection termination timely? Show the date calculation.
Read the worked answer
No, it was late. Counting “within 10 days after acceptance,” the day of acceptance is excluded. Day 1 is May 2, and day 10 is May 11. Even allowing for a weekend or holiday extension, May 20 is far beyond the inspection deadline.
The inspection contingency therefore expired before buyer’s May 20 email. Buyer cannot rely on the inspection contingency unless the contract expressly provides a different counting method or the parties signed a written extension. The broker should point the parties to the contract language rather than decide the dispute.
2. Does the June 3 loan-denial email preserve the buyer’s earnest money refund?
Read the worked answer
Probably not. The financing contingency required written notice “before June 1,” so the deadline was May 31. Buyer’s June 3 email was late.
A financing contingency is a condition that protects the buyer only if the buyer gives the required timely notice. If buyer misses the deadline, buyer may be treated as having waived the financing contingency and remaining obligated to close. Loan denial by itself does not automatically refund earnest money. The seller may have a claim, but the broker should not declare forfeiture without written release, legal advice, or the contract’s dispute procedure.
3. What should the listing broker do with the $5,000 while the parties dispute?
Read the worked answer
The broker should hold the $5,000 in trust and not disburse it to either party without a written release signed by both parties or a court order. The broker should notify both parties and the principal broker in writing, keep a clear file, and follow the contract’s earnest-money dispute provisions and Tennessee Commission requirements.
If the parties will not agree, the broker should recommend that they consult attorneys and may need to interplead the funds or follow the Commission’s prescribed dispute process. The broker should not give legal advice or choose which party is right.