The subject of deposits to be made under a contract can be tricky. Obviously the higher the deposit, the more attractive the offer. Conversely, the lower the deposit, the less attractive the offer. Yet a higher deposit creates more risk for a Buyer, while a lower deposit reduces the Buyer’s risk. Some creative agents have resorted to inserting large deposits or multiple deposits into the contract, and then suggesting to their Buyers that they need not make one or all of them. After all, how many listing agents or Seller’s attorneys actually follow up to see that the deposit(s) were timely made?
The answer to this question is that most agents/attorneys follow up to insure that the deposits were made. But few ask the question, what happens if the deposit is not made. Most simply assume that the contract is terminated or null and void. That is not necessarily the case.
When using either the FARBAR “AS IS” or Residential Contract for Sale and Purchase, the failure to timely make a deposit results in a breach of the contract. A breach of the contract entitles the Seller to elect to recover and retain the deposit for the account of the Seller as agreed upon liquidated damages, or at Seller’s option, proceed in equity to enforce Seller’s rights under the contract. This means that the Seller could bring an action to recover the deposit amount as damages if the Buyer signed the contract but failed to pay the deposit! Even more troubling for the Buyer is that if the contract includes a provision for attorneys’ fees (most do) then the Seller would be able to recover those costs as well.
As such, it is critically important that a Buyer understand that if the contract calls for one or more deposits, the failure to make those deposits itself constitutes a breach of the contract.
So the next time you sit down with a Buyer to discuss deposits, the amount of the deposits, and the timing of the deposits, make sure they understand their significance. We all understand that deposits are generally the remedy for other contract breaches. But not as many people understand that it is breach of the contract itself not to make them. And as always, should they have any questions, please have them consult an experienced real estate attorney.
Berlin Patten Ebling, PLLC
Article Authored by Evan Berlin, Esq. firstname.lastname@example.org
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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