Q: I am the Listing Agent on a Property that had multiple offers. The winning Buyer agreed to pay well over list price; he made a non-contingent offer and agreed to wire a $50,000 deposit within three business days. Five days after the contract was accepted, the Buyer’s Agent informed me that the Buyer is having difficulty getting the deposit into escrow and he wants more time.
My Sellers are furious; other offers keep coming in and the Sellers want to get rid of this Buyer. They spoke to their family lawyer (not a real estate attorney); he said that because there was no earnest money deposit, the Buyer had not given any “consideration” for the contract and thus it is “void.” Is that true? Is the contract unenforceable? What steps do I need to take to help my Sellers?
A: The attorney’s response is not accurate when dealing with standard California real estate purchase agreements; there could still be a valid agreement between the Parties irrespective of the status of the Buyer’s deposit. If the Sellers want to cancel, they must first follow the procedural steps specified in that Purchase Contract and, on a going-forward basis, you should advise them that they should only be consulting with a qualified California real estate attorney.
I. CONSIDERATION FOR CONTRACTS
All contracts must have “consideration” in order to be valid contracts. In the past, real estate purchase contracts specified that the Buyer had to make an “earnest money deposit” which was the consideration for the Seller agreeing to sell. However, none of the standard California real estate purchase contract forms (CAR, PRDS and SFAR) have an “earnest money deposit” requirement.
The consideration which makes a standard real estate purchase agreement valid is the mutual promises made by both Parties. The Buyer promises: To pay the Seller $____ for the Property on certain terms. The Seller promises: To sell to the Buyer the Property on those same terms for the same price. No other consideration is required.
II. REQUIREMENTS FOR AN ENFORCEABLE CALIFORNIA REAL ESTATE PURCHASE AGREEMENT
Standard real estate purchase contract forms define what constitutes “Acceptance” of the Agreement as the Parties must have mutually signed and delivered the documents. The existence of an initial deposit has no legal significance in creating the binding standard form agreement. All three standard contract forms use the term “initial” deposit, not “earnest money deposit” because there is no obligation for the Buyer to pay any consideration to secure the Seller’s agreement to sell. The standard real estate purchase contracts include an initial deposit because of custom and practice as well as to enable the Buyer to show “good faith” by putting a certain amount of the Buyer’s money at risk in an escrow account.
If the Parties agree to the Liquidated Damages provision, the Buyer’s deposit may be used to resolve a claim that the Buyer has breached the contract.
See Weekly Practice Tip: “Liquidated Damages” (7/02/21)
III. SIGNIFICANCE OF A BUYER FAILING TO MAKE AN INITIAL DEPOSIT
If a Buyer fails to make the initial deposit as agreed in the purchase agreement, then the Buyer is potentially in breach of that Agreement. However, the Seller cannot simply cancel; the standard real estate purchase agreement forms all require the Seller to first enforce the terms of the Agreement.
If the Sellers want to cancel the agreement because of the Buyer’s failure to make the deposit as agreed, the Sellers must first issue a Notice to Buyer to Perform giving the Buyer the agreed-upon time frame (usually 2 Days) to put that deposit into escrow in the manner specified in the contract.
PRACTICE TIPS:
LISTING AGENTS:
- While an initial deposit is not a required element to create a binding real estate purchase agreement, it is the standard of practice to have the Buyer make an initial deposit. It is dangerous for a Seller to accept an offer that has little or no initial deposit because, if the Parties mutually initial the Liquidated Damages provision, the minimal amount of deposit could limit the maximum amount that the Seller could recover in the event of a breach of contract by the Buyer.
- The best practice for all Listing Agents is to monitor whether or not the Buyer has put the initial deposit into escrow; calendar the last date that the deposit is to be made and then confirm with the Escrow Officer whether or not the deposit was actually made as agreed. If the deposit was not made, then the Listing Agent should send an email to the Seller notifying the Seller of the Buyer’s failure and recommending use of a Notice to Buyer to Perform. Sellers can send the Notice to Buyer to Perform as much as 2 Days before the last date for performance.
BUYER’S AGENTS:
- Beware of working with a Buyer who is proposing to purchase with little or no deposit; that type of Buyer has very little incentive to stay in the contract and you will not get paid if escrow does not close.
- The best practice for all Buyer’s Agents is to monitor whether or not the Buyer has put the initial deposit into escrow; calendar the last date that the deposit is to be made and then confirm with the Escrow Officer whether or not the deposit was made. If the deposit was not made, then send the Buyer an email warning that the Buyer may be in breach of contract if the Buyer does not get the deposit into escrow before the time limit in any Seller-generated Notice to Buyer to Perform.
This Weekly Practice Tip is attorney- client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2021 07/09/21