Many residential real estate contracts fall through, and don't make closing. Months after the buyer put down an earnest money deposit (often referred to as "EMD), some aspect of the deal has caused the buyer to back out.
Real estate contracts fail for a variety of reasons, and not all due to fault by one party or the other. Title issues, inspection reports, and failed financing are just a number of legitimate reasons for a buyer to cancel a contract. All that remains is for the seller's broker or settlement company to return the buyer's deposit.
But wait. What if the seller, through inattention or spite, doesn't authorize release of the deposit? This is a common situation, representing a practical defect in Maryland's rules concerning residential real estate transactions.
The problem is rooted in a rule that says release of an EMD requires a form executed by both buyer and seller. The practical effect of a seller's inattention or spite is to withhold buyer's EMD, and deprive the buyer of use of that money- for a new purchase, perhaps, or even needed living expanse.
To compel release of the EMD the buyer must initiate time-consuming mediation. This is a process that takes 45-90 days. Meanwhile, the withholding seller might exercise its superior negotiating position to negotiate a hold-back, seeking to retain a portion of the EMD for itself.
Adding to the inequity of the current paradigm, a negotiated resolution that procures the seller's signature on the form often compels buyer to grant broad release language favoring seller. In situations where the settlement may have arguably failed for seller's fault, a buyer with its own exigencies might feel pressured to grant the release in order to liberate the EMD,
The solution is very simple-- Maryland's General Assembly should pass a bill eliminating need for seller's consent on the existing form. The retention of the EMD creates a grossly unbalanced relationship where legitimate disputes exist between buyers and sellers. Under the current system, it is conceivable that buyer's EMD could remain in seller's constructive custody for months as a dispute wends through mediation and litigation.
Under the current system, an escrow agent- the settlement company or seller's broker- may elect to interplead the EMD in either the District Court of Maryland, or a Circuit Court,. The costs of interpleader are shifted to the buyer and seller, and the fund may continue to be held in the registry of the court, or in the account of the escrow agent.
The current system requires one party to a broken deal to mediation/negotiate/litigate with one hand tied behind its back-- the value of the EMD is locked up and made unavailable for the canceling buyer to make a new contract, or to pay the costs of reaching resolution of the underlying dispute.
Maryland can do better, Affordable housing, and a robust real estate market depend on the free flow of capital. Changes to EMD retention rules are long overdue.
