Is the listing firm entitled to a share of the earnest money deposit if a buyer breaches the contract?

QUESTION: I recently listed a property for sale. There were multiple offers and the property went under contract quickly. Unfortunately, the buyer’s financing fell through and the buyer  was unable to close. Shortly after the Settlement Date, the buyer confirmed in writing that the seller was entitled to the buyer’s Earnest Money Deposit. I was surprised when my seller-client called to tell me that my firm was entitled to 50% of that deposit. Was he correct?

ANSWER: He was. Paragraph 11 of the standard Exclusive Right to Sell Listing Agreement, the paragraph dealing with “Earnest Money,” has a sentence directly on point. After noting  that any earnest monies paid in connection with any transaction shall be held by an escrow agent, paragraph 11 states that any earnest money forfeited by reason of a buyer’s default  “shall be divided equally between the (listing firm) and the Seller.” Under the facts you have described, the buyer’s failure to close would properly be considered a “default.”

In our experience, most listing firms do not exercise their right to recover their 50% share when a buyer breaches a signed contract to purchase. If a listing firm knows in advance that it  will not seek to exercise its right to a share of a forfeited Earnest Money Deposit, it is perfectly permissible for the parties to strike through the relevant sentence in paragraph 11 and  initial the strike-through.

We have heard of circumstances where a buyer notifies the seller that he or she does not intend to complete the purchase and the parties then sign an agreement to terminate the  contract with the Earnest Money Deposit being disbursed to the seller. An agreed-upon termination of a contract where the parties release each other from any further contractual  obligations, and also agree to a disbursement of the Earnest Money Deposit, is different from a buyer’s “default.” When a contract is terminated by agreement, and not breached by the  buyer, the listing firm would not be entitled to a 50% share of the deposit.