Earnest Money Disputes in Texas
Residential Transactions

Topics Covered

The Process for Return of Earnest Money
Common Causes of Earnest Money Disputes
Effectiveness of a Lawsuit Remedy

Process for Release of Earnest Money

Paragraphs 18.C through E of the TREC 1-4 Residential Contract address the procedure for demanding release of the earnest money:

18.C. DEMAND: Upon termination of this contract, either party or the escrow agent may send a release of earnest money to each party and the parties shall execute counterparts of the release and deliver same to the escrow agent. If either party fails to execute the release, either party may make a written demand to the escrow agent for the earnest money. If only one party [makes demand then] escrow agent shall promptly provide a copy of the demand to the other party. If escrow agent does not receive written objection to the demand from the other party within 15 days, escrow agent may disburse the earnest money to the party making demand reduced by the amount of unpaid expenses incurred on behalf of the party receiving the earnest money and escrow agent may pay the same to the creditors. If escrow agent complies with the provisions of this paragraph, each party hereby releases escrow agent from all adverse claims related to the disbursal of the earnest money.

18.D. DAMAGES: Any party who wrongfully fails or refuses to sign a release acceptable to the escrow agent within 7 days of receipt of the request will be liable to the other party for liquidated damages in an amount equal to the sum of: (i) damages; (ii) the earnest money; (iii) reasonable attorney’s fees; and (iv) all costs of suit.

18.E. NOTICES: Escrow agent’s notices will be effective when sent in compliance with Paragraph 21 [the paragraph stating where notices should be sent]. Notice of objection to the demand will be deemed effective upon receipt by escrow agent.

Written Demand Required

Upon failure of the contract for any reason, the party desiring the earnest money must make written demand upon the title company. A copy of the demand should be sent to the other party. The written demand triggers a 15-day window during which the other party may make written objection to the title company. Phone calls, almost always legally insufficient in real estate for notice purposes, will not meet the requirements of the contract. There is nothing like being able to show a signed green card to a judge in order to prove that notice was given by certified mail.

The language of the contract is vague about which demand—demand from the party desiring the earnest money versus demand from the title company—triggers the 15- and 7-day periods, but it is prudent to be conservative and assume that these periods begin when the first party makes written demand.

It is always best to be conservative about interpreting contract deadlines and timelines. This author has seen disputes in court where the lawyers are literally arguing about the hour and minute of delivery. One should never wait until the last minute to deliver required notices.

The title company will follow up with a notice of its own that written demand has been made and enclosing a release form for signature. It must be signed by all parties and their brokers. Fifteen days are allowed for written objections to be made.

Buyer’s Failure to Obtain Financing

A common area of dispute is the buyer’s inability to obtain financing. The TREC Third Party Financing Addendum contains a blank for a specific time during which the buyer must notify the seller of his inability to obtain financing. If this notice is not timely given, the contingency is waived. Buyers often miss this detail and insist on their continuing right to get their earnest money back if their loan application is denied, even after the specified time has run. ]

Sellers, on the other hand, may believe that the buyer did not make “every reasonable effort to obtain credit approval” (as required by the Seller Financing Addendum) and therefore should not be entitled to return of earnest money even if notice was given within the prescribed period.

Unfortunately, the addendum does not go into detail about what every reasonable effort means. A buyer’s special provisions addendum to the contract can include a clause providing that a legitimate turn-down letter will satisfy this requirement.

Seller’s Failure to Cure Buyer’s Objections

If the seller does not succeed in curing the buyer’s objections to the title commitment or survey, the buyer want seek a return of the earnest money. Paragraph 6.D of the TREC contract states that “Seller shall cure the timely objections of Buyer or any third party lender [to the title commitment or survey] within 15 days after Seller receives the objections and the Closing Date will be extended as necessary. If objections are not cured within such 15 day period, this contract will terminate and the Earnest Money will be refunded to Buyer unless Buyer waives the objections.”

Failure of Seller to Complete Repairs

A less common area of disagreement pertains to repairs required of the seller pursuant to paragraph 7.D(2) of the TREC contract: “Buyer accepts the Property As Is provided Seller, at Seller’s expense, shall complete the following specific repairs and treatments. . . . If Seller fails to complete any agreed repairs and treatments prior to the Closing Date, Buyer may exercise remedies under Paragraph 15 [the default paragraph] or extend the Closing Date up to 15 days if necessary for Seller to complete the repairs and treatments.” Paragraph 15 goes on to allow the buyer the option to accept the return of the earnest money and terminate the contract.

Cases in this area are not always clear cut. The seller may believe that repairs were duly completed but the buyer may not agree, or the buyer may not like the look of the repairs. There can be a good-faith disagreement about whether or not the repairs were satisfactory; or perhaps the repair process uncovered the need for additional remedial work. A frustrated buyer whose enthusiasm has been waning may use this as an opportunity to declare the seller in default and demand return of the earnest money.

Casualty Loss to the Property

Rarely, the property will be totally or partially destroyed before closing, perhaps by flood or fire. Paragraph 14 of the TREC states that “Seller shall restore the Property to its previous condition as soon as reasonably possible, but in any event by the Closing Date. If Seller fails to do so due to factors beyond Seller’s control, Buyer may (a) terminate this contract and the Earnest Money will be refunded to Buyer (b) extend the time for performance up to 15 days and the Closing Date will be extended as necessary or (c) accept the Property in its damaged condition with an assignment of insurance proceeds and receive credit from Seller at closing in the amount of the deductible under the insurance policy.”

Failure of a Party to Close

Another common circumstance leading to a demand for payment of earnest money arises when either buyer or seller fail to close as agreed. Paragraph 9A states: “The closing of the sale will be on or before [inserted date], or within 7 days after objections made under Paragraph 6D have been cured or waived, whichever date is later (Closing Date). If either party fails to close the sale by the Closing Date, the non-defaulting party may exercise the [default] remedies contained in Paragraph 15.”

Lawsuits to Recover Earnest Money

Lawsuits may be filed in justice court so long as the total amount claimed (including attorney’s fees) does not exceed the jurisdictional limit of $20,000. If total damages exceed that amount then suit may be filed in the county court at law. Named defendants should include the party refusing to sign the release and the title company holding the earnest money. Title companies will usually respond by interpleading the earnest money (depositing it into the court’s account) which removes them from the merits of the litigation. The title company may then seek dismissal from the case or decide to remain involved in an attempt to recover attorney’s fees from the party at fault.

Before filing a legal action concerning earnest money, it is useful to consider the practical reality that attorney’s fees and costs, once added up, can easily exceed the amount of earnest money in dispute. As a consequence, many earnest money disputes are resolved by the parties’ splitting the funds and going their separate ways, respective claims of principle notwithstanding.