Can a Seller Retain the Deposit When a Buyer Breaches a Real Estate Contract?

Most real estate contracts include a provision for the Buyer to pay a deposit, also called an earnest money deposit, which is a portion of the purchase price paid generally after attorney review is concluded, and held in the trust account of one of the attorneys or the title company until the time of closing or proper termination of the contract.  If a Buyer fails to close on the real estate transaction without the excuse of an applicable contingency (i.e., the Buyer was denied a mortgage, there was an unsatisfactory home inspection), the Buyer may be deemed to be in breach of contract.  Most Sellers are under the impression that they can automatically retain the Buyer’s deposit; unfortunately that is generally not the case.

 

The standard New Jersey realtor’s contract contains a provision for the consequences of a breach of contract.  It provides that if the Buyer breaches the Contract the Seller may apply the deposit toward his or her damages, but only after an action is filed with the Court.   Unless a Buyer agrees to forfeit the deposit to the Seller, the party holding the deposit, called the escrow agent, cannot release the deposit to the Seller without a Court Order authorizing the release of the deposit.   The Seller would have to file a Complaint with the Court, either on his own or through an attorney which will likely cost thousands of dollars and wait months or even years for the Court to hear the case and a Judge to decide whether a breach occurred by the Buyer and, if so, the amount of damages to award the Seller.

To establish damages, the Seller would have to re-list the house for sale and, should the house sell for less, the Seller would be entitled to the difference between the purchase price from the breached Contract and that of the second Contract that proceeds to closing.  Other types of damages would include carrying costs for the time between the breach of the first Contract and the closing on the second contract such as tax, mortgage and insurance payments, money paid to movers that had to be cancelled, and attorney’s fees incurred as part of the first transaction.  Attorney’s fees incurred to litigate the matter are not considered damages, so a Seller would be responsible for payments of their own legal fees and could not recover those fees from the Buyer.  Therefore, if the damages are not substantial, it could cost more to retain an attorney and litigate the case than the amount of money recovered at the end of the case.