The most common claim buyers and sellers make against each other is for the release of the “earnest money” deposit.
A residential purchase agreement usually provides a certain period for buyers to perform investigations of the property or their finances. At the end of these “contingency periods,” the buyer can either back out without consequence, or move forward toward closing. If the buyer gives written notice of cancellation pursuant to his/her rights under the purchase contract, both the buyer and seller agree to sign mutual instructions to cancel the sale and escrow and release the deposit back to the buyer, less any fees and costs incurred. If the buyer cancels the contract after all contingencies have been removed or waived, generally, the seller is entitled to keep the deposit as liquidated damages, assuming the liquidated damages provision in the contract is properly executed.
Remedies when a Party Refuses to Return/Deliver the Deposit
When the buyer wishes to exercise his/her right to cancel according to a contingency within the purchase contract, and the seller disagrees that the buyer has the right to cancel, the seller might wrongfully refuse to return the deposit to the buyer. Conversely, when the buyer is in breach of a purchase contract, the buyer might refuse to release the deposit to the seller as liquidated damages.
According to CA law, withholding a deposit when there is no good faith dispute can give rise to fees and penalties. Civil Code Sec. 1057.3 provides that a party who fails to execute documents to release funds on deposit within 30 days after a written demand for the return of the funds is liable for: 1) the amount of the funds on deposit that are not held in good faith to resolve a good faith dispute; 2) if there is no good faith dispute, three times the amount on deposit or a maximum of $1,000; and 3) reasonable attorneys’ fees incurred in recovering the above penalties.