Cash Deposit Requirement in Real Estate Purchase Contracts
December 13, 2010 • 3 min read
Buckingham attorney Anthony R. Vacanti offers the following insight on the common requirement that an earnest money deposit in a real estate contract be made in cash:
This is the time of year where people focus their attention on gifts, celebrations, and decorations. People pay so much attention to the details of these tasks, yet when it comes to the details of important real estate contracts, people simply do not pay the same amount of attention. Unfortunately, for many of those people, that lack of attention may lead to worse problems down the road. I suspect many reading this article have experience negotiating and implementing real estate deals. I also suspect that those deals are memorialized in writing (if not, they should be!) However, how much attention do you give to the exact language of the contract?
The provisions of a written contract are very important, yet many buyers and sellers do not pay much attention to such provisions. Instead, they rely on form contracts and do not conform their actions to the obligations called for in such contracts. Those buyers and sellers, however, are exposing themselves to the risk of a deal imploding, and worse yet, litigation. The reason? The provisions of a contract generally constitute the “law” between the buyer and seller in the deal concerning how each party may act. The rights and obligations of the parties in the transaction only exist through the provisions of the contract, and the transaction may die by those same provisions.
A recent Ohio court decision evidences the importance of paying attention to provisions of a contract, no matter how common or simple that provision may seem. In S&G Invests., L.L.C. v. United Cos., L.L.C.,[1] the defendant corporation, United Cos., LLC (“Buyer”) contracted with the plaintiff company, S&G Invests., LLC (“Seller”) for the purchase of property. The contract contained a fairly typical earnest money deposit provision that required Buyer to deliver an initial deposit of $50,000 in cash to the escrow agent within three banking days of the contract’s effective date. The provisions of the contract indicated that failure to deliver the initial deposit would render the contract null and void.
As its earnest money deposit, Buyer delivered a certificate of deposit (CD) in the amount of $50,000 to the escrow agent. Seller did not learn of the form of deposit until months later, when it attempted to retrieve the initial deposit from the escrow agent. Upon discovering the earnest money deposit consisted of a CD, not cash, Seller requested that Buyer replace the CD with cash as required by the contract. Buyer did not comply, but instead notified Seller that it elected to terminate the contract.
Seller then filed a complaint for breach of contract. Unfortunately for Seller, the trial court dismissed the complaint, and the court of appeals agreed with the trial court’s decision. The courts determined that the CD was in Buyer’s name, automatically renewable, and nontransferable. The CD had a maturity date. Unlike cash, the funds were not redeemable until the arrival of the date. The funds were not liquid or secure like cash. The court found that Seller’s complaint for breach of contract contained a claim that Buyer breached the contract by failing to deposit cash as the initial deposit, which amounted to an acknowledgment that a CD did not qualify as cash. Therefore, according to the courts, Buyer’s delivery of a CD to the escrow agent did not fulfill the initial deposit requirement of the contract. Consequently, the contract became null and void and of no further force or effect under the plain terms of the contract. The courts found that Seller could not sue for breach of contract because there was no contract upon which to litigate since the failure of Buyer to make the earnest money deposit in cash under the terms of the contract rendered the contract null and void.
The S&G Invests., L.L.C. v. United Cos., L.L.C. case provides an important reminder to both buyers and sellers: pay attention to contract provisions and to the parties’ respective obligations under such contract. Here, costly litigation could have been avoided if Buyer complied with the express language of the contract by depositing cash, and if Seller paid attention to the fact that Buyer deposited a CD, not cash. Moreover, many form contracts require cash earnest money deposits; however, many buyers deposit checks instead of cash. Failure to strictly comply with contractual provisions, as simple as they may seem, creates the risk of the deal falling apart and/or litigation. Indeed, in the example above, the Buyer was the one who allegedly failed to perform under the contract, but ultimately got out of the deal despite such alleged failure because of a technicality based on the contract language.
So a word to the wise: pay attention to the provisions of contracts, negotiate those provisions that concern you (or hire a qualified attorney to assist), and insure you and the other party with whom you are dealing strictly comply with the terms of such contract. Property transactions live by the written word and die by the written word, so it imperative to have an understanding of the written words in the contract!
[1] Decided Aug. 9, 2010, 12th Dist. Ct. App. No. CA2010-03-017, 2010 Ohio 3691
