Buyers may lose deposit if they break contract


February 06, 1994|By Dian Hymer

Can I cancel a contract without losing my deposit?

It's customary for buyers to make a deposit at the time they enter into a contract to purchase a home. The amount of the deposit is negotiable, and it's usually applied toward the buyer's cash down payment at closing.

Your purchase contract should spell out what will happen to the deposit if the contract is terminated. For instance, if the purchase is contingent upon a certain event happening (such as loan approval or satisfactory inspections of the property), the contract should provide for the deposit to be returned to the buyers if the event doesn't occur.

Good faith is an element of most home purchase contracts. So don't think that just because your contract has contingencies in it that you can back out for any reason and get your deposit money back. For example, let's say your contract includes an inspection contingency. If you have the property inspected and problems surface that the seller is unable or unwilling to correct, your deposit is probably refundable. But if you make no attempt to inspect the property, but terminate the contract based on unsatisfactory inspections, the seller might have a legitimate claim to some or all of your deposit.

Buyers and sellers can agree to include several provisions in the purchase contract, in addition to standard contract contingencies, which may help resolve deposit disputes if they arise.

A liquidated damages or forfeiture clause usually provides for the sellers to retain the buyers' deposit if the buyers default. A default occurs when the buyers back out for a reason that's not allowed for in the contract.

Even if buyers and sellers agree to a liquidated damages or forfeiture clause, and the buyers default, the buyers' deposit money usually won't be released to the sellers automatically. Both the buyers and sellers will need to sign a release of contract form, which should stipulate that the contract is canceled. The form should also specify who's entitled to the deposit. If the contract doesn't include a liquidated damages clause and the buyers default, the sellers can pursue the buyers for actual damages, which could be more or less than the deposit amount.

If there's a dispute over the deposit, the buyers and sellers may have to resort to legal remedies to solve their problem. Some contracts include mediation or arbitration clauses which provide mechanisms for solving deposit and other contract disputes without having to go to court.

FIRST-TIME TIP: Don't enter into a binding contract unless you're sure you want to buy a property. Even though contingencies are included in a purchase contract to protect you, your deposit could be at risk if you fail to complete the purchase. Common contingencies include: Financing, inspections, an attorney's or accountant's review of the contract and the sale or refinance of another property. Few sellers will include a contingency that permits the buyers to back out for any reason.

Dian Hymer's column is syndicated through Inman New Features. Send questions and comments care of Inman News Features, 5335 College Avenue, No. 25, Oakland, Calif. 94618.

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