Earnest Money Deposit (EMD) Disputes and NVAR Real Estate Purchase and Sale Contracts

Our firm often gets calls regarding EMD disputes in real estate transactions, specifically those related to the Loudoun, Fairfax, Arlington, Prince William and Spotsylvania Counties, Alexandria City and Washington DC Association of Realtors (NVAR) Real Estate Purchase and Sale Contracts. An earnest money deposit (EMD) is an amount of money that is deposited by a buyer and held in an escrow account to ensure compliance with the terms of the Real Estate Contract. The amount of the deposit is negotiated between the buyer and seller at the time the contract is signed, with input from your agent. The EMD is held by the escrow agent, named in the contract. The real estate broker or the settlement agent can act as your escrow agent.

The Escrow Agent or Settlement Company.

The escrow agent is charged with holding the EMD until the closing. This amount is then credited to the buyer on the Closing Disclosure (the CD). In the event there is a dispute between the buyer and seller or if the closing does not occur, the escrow agent will continue to hold these funds until a Release of Deposit is executed by both parties (buyer and seller).

The signed Release details which party is to receive the EMD and specific disbursements to each party, if it is to be divided. The escrow agent cannot disburse the EMD without a signed Release. In the event the parties cannot agree on how to disburse the EMD, the escrow agent has the option of paying that amount into the court. In that event, the parties must petition the court to have it disbursed. This will cause each party to incur court and legal fees. The escrow agent has the right to subtract any fees they incur in the event they pay the EMD into the court. That will reduce the amount available for disbursement to both the buyer and seller. It is most advantageous for everyone to agree on a disbursement and prevent a court action. In the event of a dispute over an EMD, Fox & Moghul can help resolve this issue.

The NVAR Contract. 

In Virginia, the named escrow agent as well as the terms and amount of the EMD appears in paragraph 3 (Standard for NVAR Contract). While this paragraph indicates it “may” be held in an interest-bearing account, there are no other details except that all parties agree to waive any claim to any interest. Speak with your agent or Fox & Moghul to help make this decision. The contract details that the deposit is to be credited to the Buyer at closing. There is no specific provision concerning the disbursement in the event of a dispute, except to dispose of it by agreement or “any other manner authorized by law”.

Virginia also has a “Release of Sales Contract and Deposit” form that can be used in the event of dispute between parties or a cancelled closing. This form can be used to relieve all parties of their obligation under the contract and to direct that the deposit be released. Signing this form terminates the contract and authorizes disbursement of the EMD. This will need to be signed by all parties and then delivered to the escrow agent. Again, if there is failure to agree on disbursements; the escrow agent can pay it into the court, incurring the same legal & court fees as other jurisdictions.

The District of Columbia Contract.

In the District of Columbia, the GCAAR contract states the escrow agent and the amount of the deposit in paragraph 4 of that contract. As with the other jurisdictions, the deposit is credited toward the sales price at settlement. The deposit can be released per an agreement of the parties, or by the court and disposed of by any other manner “authorized by law”. A “Release Agreement” (GCAAR form1317) should be executed by both the buyer and seller to terminate the contract and disburse the EMD.

There are two parts to this form and you will need to select section A or B. Section A will authorize the escrow agent to distribute the EMD as directed. It can be returned to the buyer, delivered to the seller or divided between the parties. In Section B, the parties agree to continue attempts to complete the transaction, but give up any right to sue for specific performance.

There is a provision within paragraph 2, which states that the seller is “irrevocably authorized to sell and convey the property to another party”. Fox & Moghul advise that a final release of contract be executed by all parties before another contract for sale is signed or ideally formatted to make the proposed second contract contingent on the release of the current.

The amount of the EMD should be discussed with your real estate agent. As a seller, this can be an important consideration to prevent a buyer from walking away from the contract. For a buyer, the “good faith” deposit amount confirms to the seller your intent to complete the transaction. Your Virginia Real Estate Lawyers at Fox and Moghul stand ready to assist you. Call us for help.

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