Is The Juice Worth The Squeeze?

When a deal falls apart, the parties frequently end up in a juicy deposit dispute. Like any other legal dispute, there are two sides for the parties to consider: the legal analysis and the practical implications. The purpose of this blog is to look at the practical side of the equation.

Here is the short summary of the legal side. When a party defaults under the standard FAR/BAR contracts, their claims to any deposit are largely governed by paragraph 15. That section of the contracts gives the parties different remedies to choose from, but this blog focuses on recovery of the deposit since that is how most disputes end up resolving. The contracts say the party who did not breach is allowed to recover the deposit.

What happens if you are the wronged party, and the other side refuses to release the deposit to you? The deposit is being held by an escrow agent, and even if the escrow agent is 100% sure that you are in the right, they cannot release the deposit without both parties’ consent. So how do you force the breaching party to release the deposit? Here is where reality hits.

The FAR/BAR contract requires the parties to mediate disputes before taking any legal action. That costs money. Mediators are usually attorneys and typically charge $300-$500/hour. A typical “small case” mediation will last 3-4 hours. By the time the parties have split the mediator’s fee, and have paid their own attorneys, they have each likely paid $2,000 – $3,000. If the parties are not able to resolve the matter through mediation, the escrow agent will likely tell them that it does not want to hold the deposit any longer, and that it has to give the money to the court system until a judge can decide who gets to keep it (a process known as interpleader). The escrow agent is permitted to hire an attorney for the interpleader process, and to deduct the attorney’s fees and court costs from the deposit. That amount is typically between $2,500 – $4,000. So, before the parties are even fighting in court over who has the legal right to the deposit, the deposit amount is significantly diminished, and they will have come out-of-pocket a few thousand dollars.

If parties are forced to prosecute or defend a lawsuit, they must pay attorney fees through that process. While the amount of fees in any case is very difficult to predict, parties will typically each spend tens of thousands of dollars in fees in a disputed case before it reaches a resolution. The party who wins is allowed to recover a judgment against the loser for the fees they spent. But a judgment is just a piece of paper that says “you owe me,” and it can be very difficult to actually collect on that judgment.

The point of the above is to highlight the practical reality of having a deposit fight. It is expensive, uncertain, and frequently unsatisfying. While there are certainly deposit disputes that justify spending the time and money to have the fight, there has to be enough money at stake to make it worth the parties’ time and the significant expense…the juice has to be worth the squeeze. Otherwise, each side faces the very real practical risk that they may be proven to be legally right, but they spent far more money getting to that point than they can ever recover.

The alternative to resolving deposit disputes through the above process is to come to a voluntary agreement. Often times a voluntary agreement means that one or both parties have to make concessions that they don’t think are right or fair. It sometimes means that a party who is 100% in the right has to say: “Mr. Breaching Seller, I’ll agree to accept $4,000 of my $5,000 deposit back in order to resolve this mess, so that I don’t have to spend $50,000 to prove you wrong.” That may not be the kind of resolution that feels good, but it is often times the most practical.

If you find that your buyer or seller is engaged in a deposit dispute, be sure that they have considered the practical side of that dispute early in the process. A qualified real estate attorney can assist parties in analyzing both the legal and the practical side of a dispute, and help push the parties towards a decision that makes sense.

Sincerely,
Daniel C. Guarnieri, Esq., dguarnieri@berlinpatten.com
Berlin Patten Ebling, PLLC

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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