Show Me the "Deposit" Money

Show Me the “Deposit” Money

By Steve Gizzi and Scott Reep

Published in the Benicia Herald on Oct. 26, 2007


Most residential real estate transactions require the buyer to deposit “earnest money” into escrow within a specified period of time after the purchase agreement has been reached. The agreement may also call for an increased deposit prior to the close of escrow.

The close of escrow is typically contingent on a number of things, such as the sale of an existing home, physical inspection of the property, or financing. Sometimes the seller is unable to comply with the contingencies and the sale fails to go forward. Other times, the buyer may have located a more suitable home and they refuse to go forward with the transaction.

Leaving analysis of all possible damages aside, what happens to the deposited funds if one the parties refuses to release the money to the other party by providing written instructions to the escrow company? Hopefully, the real estate professionals are able to give their clients the proper options. However, real estate professionals are not attorneys and are limited in the advice that they can give. We have been surprised by the number of real estate professionals (. . . not in our community) that are unaware of Civil Code Section 1057.3 and fail to direct their clients to it for guidance.

The law states that it shall be the obligation of a buyer and seller who enter into a contract to purchase and sell real property to ensure that all funds deposited into an escrow account are returned to the person who deposited the funds or who is otherwise entitled to the funds under the contract, if the purchase of the property is not completed by the date set forth in the contract for the close of escrow or an agreed upon extension of time.

Any buyer or seller who fails to execute any document required by the escrow holder to release funds on deposit in an escrow account within 30 days following a written demand for the return of funds deposited in escrow by the other party is liable to the person making the deposit for the following: (1) The amount of the funds deposited in escrow not held in good faith to resolve a good faith dispute. "Good faith dispute" means a dispute in which the party refusing to return the deposited funds had a reasonable belief of his or her legal entitlement to withhold the deposited funds. This issue is decided at trial by the judge or jury; and (2) Damages of three times the amount of the funds deposited in escrow, not held to resolve a good faith dispute, but liability under for these damages is limited to between $100 and $1000; and (3) Reasonable attorney's fees incurred in any action to enforce this section.

In order to prevail on their claim the party seeking the award must establish that there was no good faith dispute as to the right to the deposited funds. Once an action is filed the escrow holder shall deposit the sum in dispute, less any cancellation fee and charges incurred, with the court and be discharged of further responsibility for the funds. This typically is not done if a small claims action has been filed. However, the escrow company will often agree to abide by the judgment after the appeal period is over.

To see the statute in its entirety, go to www.leginfo.ca.gov/calaw.html. Often a well written demand letter referring to the specific provisions of Civil Code Section 1057.3 will be sufficient to convince the other side that it is in their best interest to voluntarily release the escrowed funds. If that doesn’t resolve the dispute, you may want to consider retaining the service of an attorney.


The information herein is intended to be general in nature and does not constitute legal or tax advice. Send column suggestions to info@SolanoLawGroup.com, fax to Gizzi & Reep, LLP at 707-748-0921 or mail to 940 Adams Street, Ste. A, Benicia.