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Contract Negotiation

No Buyer Deposit = No Contract, Right?

What if a buyer and seller sign a contract but the buyer fails to submit the agreed-upon deposit?  Some Realtors think the seller is then free to relist the property – but if they call the Legal Hotline to confirm it, they find the issue isn’t quite that simple.

ORLANDO, Fla. – A common hotline call from listing agents seeks confirmation that if the buyer never makes the deposit, there is no contract. Callers want to confirm that their seller is now free to relist the property and sell it to someone else.

The seller may be able to relist the property, but it’s not because no contact exists. Money need not change hands to form an enforceable contract.

Mind blown, right?

This is a very simplistic version of Contracts 101, but essentially only three things are needed to form a contract: an offer that sets forth the terms of the contract, an acceptance of those terms, and what is known as consideration. Consideration is an exchange of something of value that binds the parties to one another.

But wait! Wouldn’t money be that “thing of value” that consideration requires? It certainly can be. In fact, now-archaic versions of contract law did require that some money be exchanged to form a contract. Over time, the amount of money shrunk until many contracts used what is called “nominal” consideration, which could be very small. This older concept of the law is why sometimes deeds will recite that a nominal amount such as $10 has exchanged hands as part of the transaction. This allows the parties to prove “consideration” without showing the actual purchase price, which was almost certainly a lot more than $10.

Eventually, lawyers and courts abandoned the concept of nominal consideration. The modern view of contract law considers the promises of the parties to one another to have sufficient value to form the basis of consideration. The buyer promises to pay a certain sum to the seller and the seller promises to convey title for that sum. No money needs to exchange hands to form the contract, though the monetary exchange will certainly have to occur to perform the contract.

If the parties neglect to include a deposit in a contract, the contract can still be formed just by the parties’ signatures.

So why have a deposit at all? Since a residential transaction can take several weeks, the seller usually wants some assurance if they’re agreeing to take their house off the market for that period. The earnest money deposit is designed to act as liquidated damages the seller can recover if the buyer does not complete the transaction.

This finally leads us to what actually happens under the Florida Realtors-Florida Bar residential contracts when a buyer fails to make a deposit. Paragraph 15(a) states that failure to make a deposit – either an initial or additional deposit – shall be a buyer’s default. Under general contract law, once a party has declared the other party in default, the party that declared breach is relieved of the duty to perform under the contract. The party not in breach can then move on to their remedies, such as recovering liquidated damages. Parties also have a duty to mitigate their damages, which, in the case of a seller could mean relisting the property.

The important takeaway: Failure to make a deposit does not render the contract void. The contract was formed by the exchange of promises and continues to exist until one party refuses to perform or declares the other in default. If the buyer fails or refuses to make the deposit, it is important for the seller to take action and not sit on their rights.

Richard Swank is Florida Realtors Associate General Counsel
Note: Information deemed accurate on date of publication

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