Earnest Money

QUESTION:   Broker represents Buyer.  Buyer used the RE-10 to terminate the contract after Buyer’s inspection period had passed.  Broker questions what happens now, and wonders if Buyer has any right to the earnest money.

RESPONSE:   Section 12(C)(1) of the RE-21 states:
If BUYER does not within the strict time period specified give to SELLER written notice of disapproved items/conditions or written notice of termination of this Agreement under the Primary Inspection or any particular 12(B)(2) reserved item, BUYER shall, for only that particular inspection or item/condition, conclusively be deemed to have: (a) completed applicable inspections, investigations, review of applicable documents and disclosures; (b) assumed all liability, responsibility and expense for repairs or corrections for that particular inspection or item/condition and (c) waived BUYER’S right to terminate based upon that particular item/condition. BUYER not providing one written notice shall not affect BUYER’S rights regarding other unrelated notices and inspections.

According to the facts presented to the Hotline, Buyer had 10 business days to conduct inspections but did not sign and deliver the RE-10 terminating the transaction until after the inspection timeframe had passed.  The above cited language clearly states if Buyer does not give written notice of disapproved items or written notice of termination within the strict timeframe, Buyer has waived the right to terminate based on the inspection. 

If both parties have elected not to proceed with the transaction and both have made a demand for the earnest money, then the Responsible Broker has three options:
(1) Any time more than one (1) party to a transaction makes demand on funds or other consideration for which the broker is responsible, such as, but not limited to, earnest money deposits, the broker shall:
(a)  Notify each party, in writing, of the demand of the other party; and
(b)  Keep all parties to the transaction informed of any actions by the broker regarding the disputed funds or other consideration, including retention of the funds by the broker until the dispute is properly resolved.
(2)  The broker may reasonably rely on the terms of the purchase and sale agreement or other written documents signed by both parties to determine how to disburse the disputed money and may, at the broker’s own discretion, make such disbursement. Discretionary disbursement by the broker based on a reasonable review of the known facts is not a violation of license law, but may subject the broker to civil liability.
(3)  If the broker does not believe it is reasonably possible to disburse the disputed funds, the broker may hold the funds until ordered by a court of proper jurisdiction to make a disbursement. The broker shall give all parties written notice of any decision to hold the funds pending a court order for disbursement.
Idaho Code § 54-2047.

The above of course assumes that the Responsible Broker is in possession of the earnest money; it is common that earnest money is deposited with title companies.  Typically, a title company will not release the earnest money until all parties have reached an agreement as to how the monies are to be distributed and/or receives a court order.  Like Brokers, the Hotline does not provide legal advice to Buyers and Sellers and does not determine the outcome of earnest money disputes.  Broker may wish to advise client to seek independent legal counsel in this matter.

            QUESTION:  Broker represents Seller in a transaction and is the Responsible Broker.  The Buyer to the transaction terminated the Purchase and Sale Agreement.  Buyer is apparently no longer working with their agent and therefore Broker and Seller have limited information about why the contract was terminated but essentially Seller believes that it was not terminated under a legitimate contingency.  The contract in question had limited Buyer’s contingencies.  Seller and Buyer eventually both made a demand for earnest money. Broker as the Responsible Broker for this transaction questions what his obligations are in event of an earnest money dispute.

RESPONSE: While highly encouraged, the RE-20 is not legally required for the return of earnest money. However not acquiring one may increase Broker’s exposure to liability. When there is disputed earnest money, the Responsible Broker holding the earnest money has three options which are outlined in Idaho Code § 54-2047 and summarized in Section 31 of the RE-21:

DISPUTED EARNEST MONEY.
(1) Any time more than one (1) party to a transaction makes demand on funds or other consideration for which the broker is responsible, such as, but not limited to, earnest money deposits, the broker shall:
(a)  Notify each party, in writing, of the demand of the other party; and
(b)  Keep all parties to the transaction informed of any actions by the broker regarding the disputed funds or other consideration, including retention of the funds by the broker until the dispute is properly resolved.
(2)  The broker may reasonably rely on the terms of the purchase and sale agreement or other written documents signed by both parties to determine how to disburse the disputed money and may, at the broker’s own discretion, make such disbursement. Discretionary disbursement by the broker based on a reasonable review of the known facts is not a violation of license law, but may subject the broker to civil liability.
(3)  If the broker does not believe it is reasonably possible to disburse the disputed funds, the broker may hold the funds until ordered by a court of proper jurisdiction to make a disbursement. The broker shall give all parties written notice of any decision to hold the funds pending a court order for disbursement.

Like Brokers, the Legal Hotline does not provide legal advice to Buyers or Sellers, nor is it intended to be used as a resolution for disputes between Buyers and Sellers.  Brokerage should advise its clients and customers to seek legal counsel if they have questions concerning their rights or contract interpretation.

QUESTION:   Broker is involved in a transaction where the Buyer terminated a contract. Broker questions if Seller can take the Earnest Money and also sue Buyer for other damages.

RESPONSE:   The RE-21 Default Section (Section 33) states in relevant part:
DEFAULT: If BUYER defaults in the performance of this Agreement, SELLER has the option of: (1) accepting the Earnest Money as liquidated damages or (2) pursuing any other lawful right and/or remedy to which SELLER may be entitled. If SELLER elects to proceed under (1), SELLER shall make demand upon the holder of the Earnest Money, upon which demand said holder shall pay from the Earnest Money the costs incurred by SELLER’S Broker on behalf of SELLER and BUYER related to the transaction, including, without limitation, the costs of title insurance, escrow fees, appraisal, credit report fees, inspection fees and attorney’s fees; and said holder shall pay any balance of the Earnest Money, one-half to SELLER and one-half to SELLER’S Broker, provided that the amount to be paid to SELLER’S Broker shall not exceed the Broker’s agreed-to commission.

SELLER and BUYER specifically acknowledge and agree that if SELLER elects to accept the Earnest Money as liquidated damages, such shall be SELLER’S sole and exclusive remedy, and such shall not be considered a penalty or forfeiture. (Emphasis added).

In the event Seller retains the Earnest Money, it is unlikely that sellers are able to also pursue other remedies. The acceptance of the earnest money would be considered Sellers’ liquidated damages. There are special circumstances to consider if the earnest money was considered non-refundable prior to Buyer’s breach, but those did not apply to the facts as provided to the Hotline.

QUESTION:   Broker’s client is involved in a transaction where the earnest money had become non-refundable. Broker’s Buyer client now wants to terminate. Broker questions if the non-refundable earnest money becomes liquidated damages preventing the Seller from seeking other damages.

RESPONSE: Section 33 of the RE-21 states in part:
33. DEFAULT: If BUYER defaults in the performance of this Agreement, SELLER has the option of: (1) accepting the Earnest Money as liquidated damages or (2) pursuing any other lawful right and/or remedy to which SELLER may be entitled. If SELLER elects to proceed under (1), SELLER shall make demand upon the holder of the Earnest Money, upon which demand said holder shall pay from the Earnest Money the costs incurred by SELLER’S Broker on behalf of SELLER and BUYER related to the transaction, including, without limitation, the costs of title insurance, escrow fees, appraisal, credit report fees, inspection fees and attorney’s fees; and said holder shall pay any balance of the Earnest Money, one-half to SELLER and one-half to SELLER’S Broker, provided that the amount to be paid to SELLER’S Broker shall not exceed the Broker’s agreed-to commission. SELLER and BUYER specifically acknowledge and agree that if SELLER elects to accept the Earnest Money as liquidated damages, such shall be SELLER’S sole and exclusive remedy, and such shall not be considered a penalty or forfeiture. However, in the event the parties mutually agree in writing that the Earnest Money shall become non-refundable, said agreement shall not be considered an election of remedies by SELLER and the non-refundable Earnest Money shall not constitute liquidated damages; nor shall it act as a waiver of other remedies, all of which shall be available to SELLER; it may however be used to offset SELLER’S damages. (Emphasis added)
Pursuant to the language above, non-refundable Earnest Money is not considered liquidated damages thus Seller is open to pursue other damages.

QUESTION:  Broker represents Buyer.  Buyer is terminating the transaction and is willing to surrender the earnest money.  Seller has agreed to terminate and accept the earnest money.  Broker questions if Seller can rightfully sue Buyer for more money if Seller accepts the earnest money. 

RESPONSE:   Typically, Seller would be barred from suing Buyer after accepting earnest money.  The contract between the parties (RE-21) states: 
If BUYER defaults in the performance of this Agreement, SELLER has the option of: (1) accepting the Earnest Money as liquidated damages or (2) pursuing any other lawful right and/or remedy to which SELLER may be entitled. If SELLER elects to proceed under (1), SELLER shall make demand upon the holder of the Earnest Money, upon which demand said holder shall pay from the Earnest Money the costs incurred by SELLER’S Broker on behalf of SELLER and BUYER related to the transaction, including, without limitation, the costs of title insurance, escrow fees, appraisal, credit report fees, inspection fees and attorney’s fees; and said holder shall pay any balance of the Earnest Money, one-half to SELLER and one-half to SELLER’S Broker, provided that the amount to be paid to SELLER’S Broker shall not exceed the Broker’s agreed-to commission. SELLER and BUYER specifically acknowledge and agree that if SELLER elects to accept the Earnest Money as liquidated damages, such shall be SELLER’S sole and exclusive remedy, and such shall not be considered a penalty or forfeiture. However, in the event the parties mutually agree in writing that the Earnest Money shall become non-refundable, said agreement shall not be considered an election of remedies by SELLER and the non-refundable Earnest Money shall not constitute liquidated damages; nor shall it act as a waiver of other remedies, all of which shall be available to SELLER; it may however be used to offset SELLER’S damages. If SELLER elects to proceed under (2), the holder of the Earnest Money shall be entitled to pay the costs incurred by SELLER’S Broker on behalf of SELLER and BUYER related to the transaction, including, without limitation, the costs of brokerage fee, title insurance, escrow fees, appraisal, credit report fees, inspection fees and attorney’s fees, with any balance of the Earnest Money to be held pending resolution of the matter.

The language above provides that forfeited earnest money acts as liquidated damages and that if Seller accepts said monies, it shall be Seller’s only recourse.

Of course, if Buyer is concerned about the Seller suing, Buyer is free to draft or have an attorney draft a separate release document that pertains to the particular circumstances of Buyer’s transaction.  Broker should not draft such a release for Buyer as that would most likely constitute the practice of law. 

Like Brokers, the Legal Hotline does not provide legal advice to Buyers or Sellers, nor is it intended to be used as a resolution for disputes between Buyers and Sellers.  Brokerage should advise its clients and customers to seek legal counsel if they have questions concerning their rights or contract interpretation.

QUESTION:  Broker has a client in a transaction governed by a purchase sale agreement that states no earnest money will be required from the Buyer.  Broker questions if earnest money is required as consideration to create a valid and binding contract. 

RESPONSE: It is highly recommended that parties use earnest money in all real estate transactions utilizing the Idaho REALTORS® forms. Those forms are designed around, and contain various references to, earnest money not the least of which is the option for a forfeiture of earnest money in the event of a Buyer default.

While it is best practice to always state an amount of earnest money, that practice is based on several aspects and not solely to create monetary consideration for the agreement to be binding.  Other factors can constitute consideration.  The legal analysis into whether a real estate contract involved proper consideration is extremely complex and it does not always turn on the fact that earnest money was provided.  The Idaho Supreme Court has stated:
While this Court will not inquire as to the adequacy of consideration as bargained for by parties to an agreement, some consideration is a necessary element to a contract. Vance v. Connell, 96 Idaho 417, 419, 529 P.2d 1289, 1291 (1974). “To constitute consideration, a performance or a return promise must be bargained for. A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promise in exchange for that promise.” Restatement (Second) of Contracts § 71 (1981).
Boise Tower Assocs., LLC v. Hogland, 147 Idaho 774, 780 (2009).

Further, the definition from Black’s Law Dictionary, a widely cited and referenced legal text defines earnest money as follows: 
A deposit paid (often in escrow) by a prospective buyer (esp. of real estate) to show a good-faith intention to complete the transaction, and ordinarily forfeited if the buyer defaults. Although earnest money has traditionally been a nominal sum (such as a nickel or a dollar) used in the sale of goods, it is not a mere token in the real-estate context: it is generally a percentage of the purchase price and may be a substantial sum.

The amount of earnest money deposited rarely exceeds 10 percent of the purchase price, and its primary purpose is to serve as a source of payment of damages should the buyer default. Earnest money is not essential to make a purchase agreement binding if the buyer’s and seller’s exchange of mutual promises of performance (that is, the buyer’s promise to purchase and the seller’s promise to sell at a specified price and terms) constitutes the consideration for the contract.” John W. Reilly, The Language of Real Estate 131 (4th ed. 1993).
EARNEST MONEY, Black’s Law Dictionary (11th ed. 2019)

These quotations are not directly on point as the hotline is unaware of a direct Idaho court case or statute that soundly addresses the issue.  As stated above best practice is to always use some amount of earnest money. 

QUESTION:   Broker represents Seller.  Buyer used the RE-10 to terminate the contract after Buyer’s inspection period had passed.  Broker questions what happens now, and wonders if Seller has any right to the earnest money.

RESPONSE:   Section 10(C)(1) of the RE-21 states:
If BUYER does not within the strict time period specified give to SELLER written notice of disapproved items/conditions or written notice of termination of this Agreement under the Primary Inspection or any particular 10(B)(2) reserved item, BUYER shall, for only that particular inspection or item/condition, conclusively be deemed to have: (a) completed applicable inspections, investigations, review of applicable documents and disclosures; (b) assumed all liability, responsibility and expense for repairs or corrections for that particular inspection or item/condition and (c) waived BUYER’S right to terminate based upon that particular item/condition. BUYER not providing one written notice shall not affect BUYER’S rights regarding other unrelated notices and inspections.

According to the facts presented to the Hotline, Buyer had 5 days to conduct inspections but did not deliver the RE-10 terminating the transaction until after this timeframe had passed. The above cited language clearly states if Buyer does not give written notice of disapproved items or written notice of termination within the strict timeframe, Buyer has waived the right to terminate based on the inspection. 

If both parties have elected not to proceed with the transaction and both have made a demand for the earnest money, then the Responsible Broker has three options:
(1) Any time more than one (1) party to a transaction makes demand on funds or other consideration for which the broker is responsible, such as, but not limited to, earnest money deposits, the broker shall:
(a)  Notify each party, in writing, of the demand of the other party; and
(b)  Keep all parties to the transaction informed of any actions by the broker regarding the disputed funds or other consideration, including retention of the funds by the broker until the dispute is properly resolved.
(2)  The broker may reasonably rely on the terms of the purchase and sale agreement or other written documents signed by both parties to determine how to disburse the disputed money and may, at the broker’s own discretion, make such disbursement. Discretionary disbursement by the broker based on a reasonable review of the known facts is not a violation of license law, but may subject the broker to civil liability.
(3)  If the broker does not believe it is reasonably possible to disburse the disputed funds, the broker may hold the funds until ordered by a court of proper jurisdiction to make a disbursement. The broker shall give all parties written notice of any decision to hold the funds pending a court order for disbursement.
Idaho Code § 54-2047.

The above of course assumes that the Responsible Broker is in possession of the earnest money; it is common that earnest money is deposited with title companies.  Typically, a title company will not release the earnest money until all parties have reached an agreement as to how the monies are to be distributed and/or receives a court order.  Broker may wish to advise client to seek independent legal counsel in this matter.

QUESTION:   Broker represents Buyer. Buyer is backing out of the offer and will lose their earnest money. Can the Broker use the Earnest Money to pay the inspector hired by the Buyer and then give the rest to the Seller?

RESPONSE: Not according to the typical terms of the RE-21 which state:
30. DEFAULT: If BUYER defaults in the performance of this Agreement, SELLER has the option of: (1) accepting the Earnest Money as liquidated damages or (2) pursuing any other lawful right and/or remedy to which SELLER may be entitled. If SELLER elects to proceed under (1), SELLER shall make demand upon the holder of the Earnest Money, upon which demand said holder shall pay from the Earnest Money the costs incurred by SELLER’S Broker on behalf of SELLER and BUYER related to the transaction, including, without limitation, the costs of title insurance, escrow fees, appraisal, credit report fees, inspection fees and attorney’s fees; and said holder shall pay any balance of the Earnest Money, one-half to SELLER and one-half to SELLER’S Broker, provided that the amount to be paid to SELLER’S Broker shall not exceed the Broker’s agreed-to commission.

The language above only contemplates Seller’s broker’s expenses being paid out of the earnest money, not Buyer’s expenses.

QUESTION:   Broker represents Buyer, who was unable to obtain financing and thus terminated the Purchase and Sale Agreement and requested a return of Buyer’s earnest money.  Seller then made a demand for half of the earnest money.  Broker is acting as Responsible Broker for this transaction and questions what his obligations are in this situation.

RESPONSE:   When there is disputed earnest money, the Responsible Broker holding the earnest money has three options which are outlined in Idaho Code § 54-2047 and summarized in Section 31 of the RE-21:
DISPUTED EARNEST MONEY.
(1) Any time more than one (1) party to a transaction makes demand on funds or other consideration for which the broker is responsible, such as, but not limited to, earnest money deposits, the broker shall:
(a)  Notify each party, in writing, of the demand of the other party; and
(b)  Keep all parties to the transaction informed of any actions by the broker regarding the disputed funds or other consideration, including retention of the funds by the broker until the dispute is properly resolved.
(2)  The broker may reasonably rely on the terms of the purchase and sale agreement or other written documents signed by both parties to determine how to disburse the disputed money and may, at the broker’s own discretion, make such disbursement. Discretionary disbursement by the broker based on a reasonable review of the known facts is not a violation of license law, but may subject the broker to civil liability.
(3)  If the broker does not believe it is reasonably possible to disburse the disputed funds, the broker may hold the funds until ordered by a court of proper jurisdiction to make a disbursement. The broker shall give all parties written notice of any decision to hold the funds pending a court order for disbursement.

Given that Broker is acting as Responsible Broker, he can utilize any of the options cited above. 

The Hotline does not determine the outcome of earnest money disputes.  Broker may wish to advise client to seek independent legal counsel in this matter.

QUESTION:   Broker represents the Seller.  Seller was under contract with a Buyer who did not go through with the purchase.  Seller sent a Contract Termination and/or Release of Earnest Money (RE-20) to Buyer but Buyer has not signed it.  Broker questions if she can relist the property without a fully executed RE-20 or during an earnest money dispute.

RESPONSE:   Having both Buyer and Seller signatures on the RE-20 is best practice, but it is not required.  Broker’s file should reflect that the RE-20 with Seller’s signature was sent to the Buyer’s agent or other suitable documentation sufficient to notify Buyer of Seller’s termination. Broker can relist the property and should direct client to private legal counsel or to the small claims court to resolve the earnest money dispute.