When A Dispute Arises
10/26/2003

Real estate transactions are often long, complicated processes. Sometimes before a deal can close, the two parties, might disagree on certain issues, which might lead to the failure of the deal, and then often, and the seller pocket the buyer’s deposit. 

Is the seller entitled to take the buyer's deposit?

Generally, most of the real estate contracts including the contracts approved by California Association of Realtors contain the Liquidated Damage Clauses. This clause basically says that if the buyer breaches or defaults the contract, the seller is entitled to liquidate damages, which is usually the initial deposit that the buyer made into the escrow.

The processes of such are that the seller has to specifically inform the escrow holder and the buyer, announces that the buyer breaches or defaults on the contract. If the buyer does contest to this notice, then the escrow company may release the deposit to the seller. But in many times, the buyer will not agree that he or she is the one at fault. 

When this happens, a dispute has arose, then the escrow company cannot release the money to any party until further decision is made in court order or arbitration results.

Even though the seller has the right to take the buyer’s deposit as damages, but the liquidated damage cannot exceed 3% of the selling price. The way the law stand is that the seller should not use the damage clause to unfairly punish the buyer.  Seller should only ask for this monetary damage when he or she truly believes that the buyer has wrongfully breached the contract. If the buyer believes that the seller has wrongfully kept the deposit, he or she may resort to arbitration or lawsuit, and recover punitive damages from the seller for up to 3 times of the deposit that the seller kept.

According to the CA real estate law, if a real estate transaction cannot close under the escrow period, the deposit minus the liquidated damages should be returned to the buyer within 15 days. If the seller is given notice in writing by the buyer to request a refund, and the seller has failed to respond after 30 days, then the buyer can sue the seller for punitive damages plus the attorney fee.

Therefore, the seller should be careful when making the decision to resort to such a dispute.  Unless the seller has reason to believe that the buyer unlawful breaches the contract, do not try to punish the buyer by keeping her or his deposit.

The Liquidated Damage Clauses is not mandatory in a contract.  Both parties have to agree such clauses in order for the contract to be law binding. 

When the contract contains no such clause, it doesn’t mean that the buyer can be free of responsibility when defaulting or breaching the contract.  The seller can still pursue damages by lawsuit for arbitration.

Buying or selling your house should be a cheerful, profitable thing. Whenever a dispute arises, however, it’s costly and time consuming for both parties.

Usually, when a dispute arises, the real estate agents for the both parties will try to negotiate and resolve the issues first. Most of the time, the dispute will end there and never go to court or arbitrator. This is also the benefit of having realtors working for you in a real estate deal.

However, sometimes talking might not be enough and some instance may spin out of control of the realtors, and will have to resolve to other alternatives.

One alternative is to talk about it in person.  Although sometimes meeting the other party in person may not help, then a mediator may be hired to try to compromise and negotiate between the two parties.  

Sometimes a lawyer can be hired to help with the negotiation process.

The benefits of having a mediator are that it’s fast, cheap and easy. An experienced, professional mediator can be found in many government sectors, or at private associations.  The cost of mediator can be paid by both parties.

If negotiation and mediation cannot solve the problem, the next step would be arbitration or lawsuit.

We will explore further more into arbitration in the next article.

I have experienced many dispute, some trivial, some more serious than the others, with all kinds of reasons.  To get to the bottom of the things, a dispute arises when one of the parties cannot compromise with the other. If both parties are willing to compromise and come to a mutual solution, then most transactions will be successful and pleasant.

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