Earnest Money is almost always involved in an offer to purchase. The terms of the contract determine when the earnest money is due. But what if the funds are not delivered on that required date? What are the consequences and how should it be handled?
If the funds are not delivered on time, is the Buyer in default?
Yes, the Buyer is in default. But that doesn’t mean the contract has failed. The Seller’s right to terminate when earnest money is late is limited. First, the Holder named in the contract must promptly give Notice to both the Buyer and the Seller that the funds have not been delivered. The Buyer then has three (3) banking days from the date of receiving the notice to cure the default. If the Buyer does not do so, the Seller may, within seven (7) days thereafter, terminate this Agreement upon notice to Buyer. If the Seller fails to terminate the Agreement timely, Seller’s right to terminate based on the default is waived and the contract is enforceable.
What if an Earnest Money Check was Delivered, but is Dishonored?
The GAR Purchase and Sale Agreement provides that if the earnest money check is not honored for any reason, the holder is required to immediately notify all parties, even if the Holder believes that the bank has made a mistake. After the Holder’s notification, the Buyer then has three banking days to deliver good funds to the Holder. In other words, the buyer is given an opportunity to cure the default of the check being dishonored. The same 7 day process for Termination applies. If the seller chooses not to terminate within the relevant seven-day period after receiving notice that the buyer has not timely delivered the earnest money, or even without any earnest money at all, the contract is still enforceable since the seller has waived the right to terminate.
If earnest money is not delivered at all, does the contract fail for lack of consideration?
Georgia courts have held that failure to pay escrow money does not make the contract void for lack of consideration. The exchange of promises, that is, the agreement to sell and to buy, is sufficient consideration to enforce the contract.
If the Buyer delivers the funds late and no Notice of Default was ever sent, is the buyer in default?
Technically the buyer was in default, but the Buyer has cured the default. The law does not require a useless act, so the notice process is not necessary.
Should an amendment acknowledging the default and the receipt of earnest money funds be created?
Whenever there is a possibility that a contract may be interpreted in opposing ways, it makes sense to clarify the situation with an amendment. An amendment is not required for the contract to be valid, but it is a good practice. Consider this language: “Seller and Buyer acknowledge that earnest money was delivered to the Holder after the time specified in the Purchase and Sale Agreement and that any default by the Buyer for late delivery of earnest money has been cured by the Buyer.”
Remember to deliver earnest money to the Broker!
A salesperson should not hold an earnest money check until the offer is accepted. It must be given to the Broker holding their license as soon as practically possible. If the signed contract states that the check is postdated and is to be held in the file, it still must be given to the Broker.
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