Contract Down Payments

January 25, 2018 | By Charles Botensten

Q: I am a real estate agent representing a seller of a condominium.  The purchaser of the condominium is in default under the contract of sale.  Can the seller automatically keep the contract down payment?

 

A: It is a generally held misconception that the seller may automatically keep a down payment if the purchaser is in default under a residential real estate contract.  However, the circumstances under which the seller may keep the down payment depend on the language in the contract of sale entered into between the seller and the purchaser.  Under the standard form of condominium contract, the seller may not automatically keep the down payment even if the purchaser is in default under the contract.  Rather, the purchaser and seller must follow a strict process wherein the seller makes a demand for the down payment to the escrow agent holding the down payment (the escrow agent is usually the seller’s attorney).  If the purchaser rejects such a demand for the release of the down payment, the escrow agent must not release the down payment until the purchaser and seller agree as to the distribution of the down payment.   Moreover, in the standard form of condominium contract there is no specific time frame within which the parties must agree to the distribution of the disputed down payment nor does the contract require a purchaser to give a specific reason why the purchaser is rejecting the demand for the down payment (even if the purchaser is in default under the contract and has no legitimate grounds to reject such demand).  Accordingly, a dispute over the distribution of a down payment can involve a significant amount of time and legal fees.

Important Tip:  It is recommended that the down payment provision in most standard forms of residential real estate contracts be amended by attorneys through the addition of the following provision:

Supplementing and modifying paragraph __ of the Contract, in the event that the Escrowee receives a Notice of Objection from a party objecting to the release of the Contract Deposit, then the party providing said notice of Objection must bring an action or proceeding to recover the Contract Deposit within forty five (45) days of the Escrowee’s receipt of the Notice of Objection.  In the event that the party providing the Notice of Objection fails to commence said action or proceeding within the foregoing time period, then the Escrowee shall be permitted to release the Contract Deposit to the party who gave Notice to the Escrowee demanding payment of the Contract Deposit. In the event that either party commences an action or proceeding against the other party in connection herewith, the non-prevailing party shall reimburse the prevailing party for all court costs, including without limitation reasonable attorneys’ fees, incurred in connection with such action or proceeding.

The addition of this provision compels the parties to the contract: (i) to seek resolution of the dispute over the down payment in a specific time frame and (ii) to consider whether they wish to risk making a bad faith demand for the down payment or a bad faith objection to a legitimate claim for a down payment (because the prevailing party in such a dispute will be entitled to have their legal fees covered by the non-prevailing party).

The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel

Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP