Deposits, and maybe deposit(ions)

I regularly become involved in disputes concerning deposits on real estate.   These disputes generally arise after parties have execute a purchase and sale agreement and a buyer tenders to the broker the amount of the deposit that is required under the previously signed offer to purchase.   

In general,  buyers have a greater emotional and financial investment in the deposit.   The reasoning behind this  is simple:   the deposit funds originate from the buyers.    If the buyer loses the right to the deposit,  they lose money that was originally theirs, and they don't end up with the property they were originally interested in buying.   If the seller loses the right to the deposit,   they may be able to secure an offer from another buyer at the same or even a greater price than was offered by the original buyer.  In that event the deposit is easily forgotten.

One aspect of the law concerning deposits that many people do not understand is that even if a seller finds another buyer and at a higher price,   the seller is entitled to the deposit if (a) the seller can prove that the buyer failed to perform under the P&S; and (b) the deposit amount that was negotiated was a reasonable estimate of the seller's probable loss at the time the purchase and sale agreement was signed.    In the late 1990s,  our Appeals Court ruled that you cannot compare the seller's actual loss with the loss that was jointly estimated by the parties and then decide whether the estimate was accurate or fair.    Instead,  the court said that the inquiry must focus on the estimate as it was formulated when the parties signed the P&S.    This decision gives sellers a potential windfall,  particularly when the real estate market is healthy and sellers have the capacity to secure an offer from another buyer at a higher price.

Quite often we see buyers become remorseful about their decision to buy a property.    One device that these buyers attempt to use is to have their prospective lender or mortgage broker issue a rejection of their loan application prior to the "mortgage contingency" deadline that is included is most P&S agreements.   The courts scrutinize these rejections and have been clear in holding that a rejection must have been issued by the lender or mortgage broker in good faith in order for a buyer to be able to use the rejection as a basis for seeking a refund of their deposit.

Buyers are not without other effective weapons.    A buyer may be able to show that a seller could not have been able to deliver clear title to the property on the date agreed to for the closing.    For this reason buyers are best served if they do not openly disclose to the seller that they cannot close,  and sellers are best served if they make sure they are at the registry of deeds on the scheduled closing date with deed and other required documents in hand.

In the end,  most disputes about deposits do not justify protracted litigation.   I often advise clients to consider arbitration as an alternative remedy (provided the other party agrees).   This is generally a less expensive, more expeditious method for resolving these matters.   


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