Is a Non-Refundable Deposit Really Non-Refundable?

By James L. Goldsmith, Esquire

There is no law that says a purchase deposit may not be non-refundable.  The Standard Agreement of Sale (ASR) contemplates that deposit funds will be returned to the buyer if the agreement is terminated pursuant to any of the contingencies and certainly in the event of seller default.

It would be most unusual for a buyer to enter into an agreement contingent upon satisfactory inspections and yet lose his deposit when bailing out as a result of a property condition.  If this is what the parties negotiate, however, so be it.  In fact, this is not an infrequent position taken in commercial sales.  What many licensees do not consider when attempting to make a deposit non-refundable is the possibility of seller default.  It is one thing to lose a deposit if a buyer walks, even on the basis of an inspection finding, but another when the result of the failed transaction is an egregious breach by seller.  Is it fair for a buyer to lose a deposit when a seller intentionally misrepresents or conceals a condition?  And, imagine explaining to a buyer why his deposit will not be refunded simply because the seller has elected not to proceed with the transaction!

I am involved in litigation where the “deposit at signing of this Agreement” was described as “$5,000.00 NON-REFUNDABLE.”  The Agreement was contingent on a home inspection and also mortgage financing. When the buyer’s financing was rejected because of a low credit score, the buyer sought a return of his deposit.  In the ensuing lawsuit, the buyer claimed that the return of his deposit was controlled by language in the mortgage contingency clause at paragraph 8(E)(4) where it states that if the mortgage loan is not obtained for settlement, all deposit monies will be returned to buyer.

So which provision controls: the very bold and clear statement that the deposit is non-refundable; or the conflicting preprinted language found in the mortgage contingency clause?  “It depends” is not a very satisfying response so I will venture a guess: the buyer will prevail and the deposit funds will be returned.

In the face of conflicting contractual provisions, the law provides guidance.  Generally, handwritten, specific entries are preferred over the general preprinted language of an agreement.  It tends to reflect the intent of the parties.  In our case, however, the statement that the deposit is non-refundable is hardly as specific as the language found in the mortgage contingency clause, which provides for a return of the deposit if the mortgage loan is not acquired.

Having already ventured a guess let me make another prediction: the responsible salesperson will contribute money to resolve the suit.  The basis for finding the salesperson culpable is that whenever a salesperson picks up a pen and alters an agreement of sale, she must do so carefully and in a manner that resolves all potential ambiguity.  Was the agreement between the buyer and seller that the buyer would or would not receive the return of deposit monies if no mortgage was acquired?  Why didn’t the agent modify that language in the mortgage contingency clause to remove all ambiguity?

When seeking to avoid the risk of malpractice, rule #1 is do not stray from the customary, well-worn path without the benefit of a mentor or legal counsel. I have heard it said that a smart person knows what he does not know!  Any alteration of the agreement of sale requires a thorough assessment of all the potential situations that may arise to assure that the modifications adequately address the eventualities.  Usually, a departure from the standard provisions requires more language than less to assure that all of the eventualities are covered.  A good way to avoid risk is to direct the consumer who seeks modification of the Standard Agreement to their legal counsel to propose the language to be inserted.  This assures that you bear no liability for any ensuing problems.



Copyright © James L. Goldsmith, Esquire, CALDWELL & KEARNS, P.C., 2012

All Rights Reserved

Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR.  A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees.  He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission.  He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.realcompliance.com.