Most residential real estate contracts in Texas are conducted using the standard Texas Real Estate Commission (“TREC”) contract. Under this contract, there are several instances in which the termination of the transaction results in the Earnest Money being returned to the buyer. Real Property Transactions in Texas can be very confusing and most parties fail to read the entire contract, relying on their agent to look out for their interests.

what is earnest money?

In real estate transactions, Earnest Money is a deposit made by the buyer into a trust or escrow account. Earnest Money is used to show the seller that the buyer has entered into the transaction in good faith and, oftentimes, allows the buyer additional time to secure financing. When the transaction is complete, the Earnest Money is credited toward the buyer’s down payment. In most situations, if the seller terminates the transaction the Earnest Money is returned to the buyer. However, if it is the buyer who terminates the transaction, the Earnest Money is generally awarded to the seller. In all circumstances, the return of the Earnest Money is governed by the contract between the buyer and seller.

This article will focus on the provisions generally found within the TREC contract that specify which party is entitled to the Earnest Money.

Termination During the Option Period

An Option Period is length of time determined by the contract, often five to 14 days, during which the buyer can inspect the property and determine whether he/she wants to continue with the purchase of the property. A small fee, the Option Fee, is paid as consideration for this period. The Option Fee is forfeited to the seller if the transaction is terminated during the Option Period. If the transaction proceeds and the property is purchased by the buyer, the Option Fee is often applied to the purchase price.

Generally, if the buyer terminates the transaction for any reason during the Option Period the Earnest Money will be returned to the buyer.

Under the TREC contract, there are often specific provisions that allow for the return of the Earnest Money to the buyer as a result of certain actions of the seller. The remainder of this article will focus on those specific provisions. NOTE: the provisions of the TREC contract can be altered to fit the needs or desires of both parties. To ensure that your rights as a seller or buyer are protected you should have the contract evaluated by a Real Estate Attorney at the commencement of the transaction.

language from a sample contract

Following is an example of language found in a sample contract:

6. TITLE AND SURVEY:

B. COMMITMENT:

“Within 20 days after the Title Company receives a copy of this contract, Seller shall furnish to Buyer a commitment for title  insurance (“Commitment”) and, at Buyer’s expense, legible copies of restrictive covenants and documents evidencing exceptions in the Commitment (Exception Documents) other than the standard printed exceptions. Seller authorizes the Title Company to deliver the Commitment and Exception Documents to Buyer at Buyer’s address shown in Paragraph 21. If the Commitment and Exception documents are not delivered to Buyer within the specified time, the time for delivery will be automatically extended up to 15 days or the Closing Date, whichever is earlier. If, due to factors beyond the Seller’s control, the Commitment and Exception Documents are not delivered within the time required, Buyer may terminate this contract and the Earnest Money will be refunded to Buyer.”

D. OBJECTIONS

“Buyer may object in writing to defects, exceptions, or encumbrances to title: disclosed on the survey or other items 6A(1) through (7) above; disclosed in the Commitment, Exception Documents other than items 6A(1) through (8) above; or which prohibit the following use or activity: [blank space available to add uses or activities].

Buyer must object the earlier of (i) the Closing Date or (ii)_______ days after Buyer receives the Commitment, Exception Documents, and the survey. Buyer’s failure to object within the time allowed will constitute a waiver of Buyer’s right to object; except that the requirements in Schedule C of the Commitment are not waived by Buyer. Provided Seller is not obligated to incur any expense, Seller shall cure the timely objections of Buyer or any third party lender within 15 days after Seller receives the objections and the Closing Date will be extended as necessary. If objections are not cured within such 15 day period, this contract will terminate and the Earnest Money will be refunded to Buyer unless Buyer waives the objections.”

7. PROPERTY CONDITION

B. SELLER’S DISCLOSURE NOTICE PURSUANT TO §5.008, TEXAS PROPERTY CODE (NOTICE):

(check one box only)

“(2)  Buyer has not received the Notice. Within ______ days after the effective date of this contract, Seller shall deliver the Notice to Buyer. If Buyer does not receive the Notice, Buyer may terminate this contract for any reason within 7 days after Buyer receives the Notice or prior to the closing, whichever first occurs, and the Earnest Money will be refunded to Buyer.”

E. LENDER REQUIRED REPAIRS AND TREATMENTS:

“Unless otherwise agreed in writing, neither party is obligated to pay for lender required repairs, which includes treatment for wood destroying insects. If the parties do not agree to pay for the lender required repairs or treatments, this contract will terminate and the Earnest Money will be refunded to Buyer. If the cost of the lender required repairs and treatments exceeds 5% of the Sales Price, Buyer may terminate this contract and the Earnest Money will be refunded to Buyer.”

F. COMPLETION OF REPAIRS AND TREATMENTS:

“Unless otherwise agreed in writing, Seller shall complete all agreed repairs and treatments prior to the Closing Date. All required permits must be obtained, and repairs and treatments must be performed by persons who are licensed or otherwise authorized by law to provide such repairs or treatments. At Buyer’s election, any transferable warranties received by Seller with respect to the repairs and treatments will be transferred to Buyer at Buyer’s expense. If Seller fails to complete any agreed repairs and treatments prior to the Closing Date, Buyer may exercise remedies under Paragraph 15 or extend the Closing Date up to 15 days if necessary for Seller to complete the repairs and treatments.”

9. CLOSING:

A.

“The closing of the sale will be on or before _____________________, _________, or within 7 days after objections made under Paragraph 6D have been cured or waived, whichever date is later (Closing Date). If either party fails to close the sale by the Closing Date, the non-defaulting party may exercise the remedies contained in Paragraph 15.”

14. CASUALTY LOSS:

“If any part of the Property is damaged or destroyed by fire or other casualty after the effective date of this contract, Seller shall restore the Property to its previous condition as soon as reasonably possible, but in any event by the Closing Date. If Seller fails to do so due to factors beyond Seller’s control, Buyer may (a) terminate this contract and the Earnest Money will be refunded to Buyer (b) extend the time for performance up to 15 days and the Closing Date will be extended as necessary or (c) accept the Property in its damaged condition with an assignment of insurance proceeds and receive credit from Seller at closing in the amount of the deductible under the insurance policy. Seller’s obligations under this paragraph are independent of any other obligations of Seller under this contract.”

15. DEFAULT

“If Buyer fails to comply with this contract, Buyer will be in default, and Seller may (a) enforce specific performance, seek such other relief as may be provided by law, or both, or (b) terminate this contract and receive the Earnest Money as liquidated damages, thereby releasing both parties from this contract. If Seller fails to comply with this contract, Seller will be in default and Buyer may (a) enforce specific performance, seek such other relief as may be provided by law, or both, or (b) terminate this contract and receive the Earnest Money, thereby releasing both parties from this contract.”

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The attorneys at The Farah Law Firm understand that purchasing property is oftentimes the single largest investment a person can make and the process can seem daunting, even with the assistance of a real estate agent. Our attorneys have the experience and compassion to explain every step of the process and will stay by your side every step of the way to ensure that your rights are properly protected. Whether you need Document Preparation, Closing Services, or any other Real Estate concern, contact one of our experienced attorneys today.