What Should You Do With an Unresolved Earnest-Money Dispute?

My client’s contract to sell his home fell through, and the buyer and seller disagree over who is at fault and who should get the earnest money that was deposited with the title company. Now my seller wants to put the property back on the market even though the earnest-money dispute hasn’t been resolved. What should I do?

Since the parties haven't agreed on the termination of the contract and no judge has decided the issue, you shouldn't give either party advice about the termination of the contract. Tell your seller to get advice from his attorney concerning the risks of proceeding with a subsequent sale of the property without a final settlement of the issue of contract termination.

The seller's primary goal should be to have formal termination of the contract. That ensures he can put the property back on the market and sell it to someone else without risking a lawsuit that could stop a subsequent sale of the property.

A contract can be formally terminated if both parties agree to terminate—usually in writing with a release-of-earnest-money form—or if a judge orders the contract to be terminated. Because of the potential risk of an adverse ruling by a judge concerning the seller's right to terminate the contract, title companies often refuse to open a second escrow file on a property where the first contract has not been formally terminated.

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