Expert: Todd C. Menard - 4/13/2010

Question
QUESTION: Hi Todd,
I'm a Realtor in Gilbert, AZ, and submitted an offer for some buyers on an MLS-listed short sale home (single family detached) in the town of Maricopa.  The sellers signed the purchase contract and sent an Addendum.  The Addendum included, among other things, this phrase:  

"A $700.00 nonrefundable earnest money deposit is required for 60 days to be deposited with *****, a copy of the earnest money receipt to be received within 2 business days of acceptance of this contract, . . . . Upon agreement notice, if Buyer does not agree to terms of the sale from lender, then the earnest money deposit is refundable."  

My buyers signed the addendum and I sent it to the sellers' agent.

Since this time, there have been some "second thoughts" on purchasing this property.  We have not made the Earnest Money deposit yet to the escrow officer at the Title Company.  The two business days have passed.  Because the two business days have passed, are we released from the contract, even though we signed the Addendum and turned it in?  Is there an ethical issue?  I regret that my buyers ever signed that Addendum, but here we are.  

Once again, thanks for your help.

ANSWER: Hello Frank - The contract is valid and enforceable. The buyer now has the obligation to deposit the earnest money within the two days. Failure to deposit the funds is a breach of the covenant and therefore the listing agent should issue a 'three day cure' notice to the buyers agent (you) indicating 'buyer has failed to provide seller with an earnest money receipt documenting deposit of the earnest money in accordance with lines _______ of the contract/addendum." the buyer now has three (3) days to perform. If the buyer does not perform then the buyer is in breach of the terms of the contract and subject to remedies set forth in the contract or provided by law. Even though you may see this take place frequently, our AZ real estate license only allows us to practice law as it relates to the transfer of real property, not provide legal advice. You should however explain to your client that there may be legal consequences to their decision not to perform and at this point you should always recommend to your client when contemplating a decision that is in opposition to their obligations of a contract, to seek legal advice. This is one of those times. You should also talk to your designated broker about this as it is an agents duty to discuss all situations that may result in a potential claim/law suit or promote a lack of goodwill to the brokerage. I hope this has assisted you in the direction you should take. Article 1
"When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client."
Article 13
"REALTORS® shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it"

---------- FOLLOW-UP ----------

QUESTION: Thanks Todd for the excellent and concise response!  I'll contact my broker.  Could I ask you a quick follow-up question?  

I Emailed the addendum with the buyers' signatures to the listing agent last Monday, April 5.  On Thursday (April 8) I Emailed the listing agent and said the buyers wanted to first learn their chances of getting another short sale and wouldn't be sending the Earnest Money in.  The selling agent never replied with a cure notice -- in fact, he never replied to the Email.  He just changed the home's status to "Active" in the MLS.  Does his lack of response change the nature of the issue?

Answer
Hello Frank - It is prudent and recommended that you obtain some form of cancellation or acknowledgement of cancellation from the listing agent. Many agents/brokers consider the buyers failure to deposit the earnest as breach in itself and therefore just anticipate the contract is cancelled, but there is a valid contract out there that needs some form of mutual agreement to cancel... in lieu of the cure period notice. A simple email from the listing agent could suffice as mutually agreed confirmation. This email/document can be added to the transaction file for future reference. Good practice. Hope this helps. - Todd Menard