Know Your Contract

 

“Deposit” Means All Deposits

Paragraph 2 PURCHASE PRICE in both the “AS IS” and the “Standard” FR/BAR Contract* is the section of the Contract dealing with earnest money deposits on a purchase by a Buyer. In order for there to be a valid and binding contract, there must be an offer made by the Buyer, an acceptance by the Seller, and consideration for the contract. Generally, the earnest money deposit is the Buyer’s consideration (the Seller’s consideration is the agreement not to sell the property to someone else).

Typically, the Initial Deposit is made either 1) with the offer, or 2) within a certain prescribed number of days after the Effective Date (see Lines 27-31 of either contract). Since an Initial Deposit is pretty standard, not too much thought is given about the Initial Deposit. Many contracts, but certainly not all, call for an “Additional Deposit”. The Additional Deposit is typically called for after the completion of the Inspection Period, but the specific timing can be established in Lines 35-36 of the Contract.

In the event of a dispute among the parties (the merits of any particular dispute are not the focus of this blog), the non-defaulting party will be making a demand for the “Deposit”). This is where considerable misunderstanding exists with regard to deposit funds. Most agents and their Buyers/Sellers presume that the Initial Deposit is at risk, but mistakenly assume that the Additional Deposit is not at risk (unless and until it is made as required by the Contract). This is particularly troublesome when a default is alleged between the Effective Date and the date the Initial Deposit is due and/or the date an Additional Deposit is due.

Line 37 of both contract forms provides: “(All deposits paid or agreed to be paid, are collectively referred to as the “Deposit”).” What this means is that if a Buyer has contractually agreed to make an Initial Deposit and an Additional Deposit, the two together constitute the “Deposit”, regardless of when the funds are actually tendered.
So, if a Buyer is alleged to have defaulted prior to the date the Initial Deposit is due, the entire Deposit (both the Initial Deposit and the Additional Deposit) is at risk – even if no money has actually been tendered! Now, collection by the non-defaulting party may take some doing, but that is also beyond the scope of this blog.

Care must be taken by Buyers and their agents when agreeing to deposit(s) and when they are to be paid, understanding that ALL deposit funds are at risk once the Contract is fully signed (that is the date the Buyer “agrees” to pay deposits). Many times, for the Buyer’s convenience, a Buyer makes the Initial Deposit and the Additional Deposit at the same time (notwithstanding that the actual tender of the Additional Deposit is not due until later), thinking that in the event of a default, only the Initial Deposit is at risk. It bears repeating, ALL agreed upon deposits are at risk as soon as the Contract is effective.

There are a myriad of reasons that make up the decision on how much and when deposits are agreed to be paid. When deliberating what kind of offer is to be made, among the many other decisions that have to be made, please be mindful that however deposit funds are broken up, it is the totality of the deposit that is at risk.

Should you have any questions or concerns with regard to deposits, whether initial or additional, we urge you to contact or consult with your local real estate attorney, for additional guidance.

* the FR/BAR Residential Contract For Sale and Purchase, and the “AS IS” Residential Contract For Sale and Purchase (approved by The Florida Realtors and The Florida Bar, version (6/19) © 2017)

 

Sincerely,

Mark C. Hanewich, Esq. mhanewich@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.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

www.berlinpatten.com

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