Buyers’ legal rights to return of their earnest money deposits (EMDs)

Sep 8, 2020 | Earnest Money Deposits, News

There are multiple legal bases for condo buyers to demand the return of their EMDs. Below are some of the major grounds used for EMD returns, including ground for return of buyer’s deposits due to CoVid-19. For more information and a complimentary review of your buyer’s documents, please contact our office.

 The well-established legal doctrine of “force majore,” or unforeseeable circumstances, may be available to rescind and terminate the PSA, and to require return of the EMD to buyers. 

The law, based on the doctrine of force majore, allows a party to be potentially free from his or her contractual obligations if their inability to perform was caused by an extraordinary event or circumstances that the party had nothing to do with and the consequences of the event are unpreventable. 

Here, buyers obviously did not cause the pandemic, which caused enactment of government shutdown orders, and the greatest unemployment since the Great Depression. Likewise, the inability of the party to qualify for financing, and to close on the transaction, are  consequences beyond the control of many buyers. 

The initial POS did not comply with the content and timing requirements of the Washington Condominium Act (WCA). 

Under the WCA, sellers must provide to the buyers a public offering statement (POS) that describes or addresses 40 issues related to the project, such as construction warranties, physical hazards particularly affecting the condominium, material differences between the model unit and the buyer’s unit, description of permitted uses and restrictions, and more. The POS must be given to the buyer at least seven days prior to execution of the purchase and sale agreement (PSA).  The buyer can argue that the seller did not comply with the minimum length of time required between delivery of the POS and the signing of the PSA, and that the description and discussion of the 40 required issues are incomplete, inaccurate or misleading. 

The addendum to the POS either does not comply with the WCA or is not acceptable to and is rejected by the buyer, pursuant to their rights under the WCA. 

Sellers are required to “promptly amend” the POS to “reflect any material changes in the information” required by the WCA. Buyers can contend that the issuance of an addendum was not sufficiently “prompt,” given changed circumstances that were known or should have been known, by the seller. The seller may not have described every material change to the project or the physical hazards confronting the buyer’s use and enjoyment of their unit or the project (or even in the immediate vicinity of the project). 

The buyer can further argue that it does not wish to proceed in light of the material changes concerning the project, and advise the seller that it chooses to terminate the transaction. 

The forfeiture provisions of the EMD may be an unenforceable “penalty” and are not allowed to be treated as liquidated damages under the PSA.         

The courts have found in both the context of contractual law in general, and

EMDs in particular, that in certain circumstances so-called forfeiture provisions may not be legally enforced because they constitute a “penalty” because it is not reasonably related to the likely actual damages that the non-breaching party will suffer.

The requirement of an EMD equal to 10 percent is double the amount potentially considered to be a “safe harbor” in a PSA. 

Typically, sellers restrict the amount of EMD to no more than 5 percent of the purchase price because they know that any EMD that exceeds that percentage is without any legal basis for being treated as forfeited as liquidated damages. Yet, amazingly, some sellers are requiring twice or double that amount be paid by buyers as deposits, giving buyers legal grounds to demand return of their money.         

According to some sellers, they have a waiting list of potential buyers eager to snap up any condo unit that becomes available, meaning there may be no damages, and probably even a potential profit to the Sellers, as a result of the termination of the PSA.

Assuming that a condo project has a waiting list of prospective buyers, who are ready, willing and able to close on a unit that becomes available, then it is likely that the seller will suffer no loss or damages because of a buyer’s termination of the PSA and return of its EMD. Indeed, current market reports state that the Seattle area has the hottest residential market in the entire US. Hence, there is no valid reason for the EMD to be forfeited by the buyer. 

Please contact us for a complimentary review of your buyer’s documents.