by SE Mathews

Created on: December 22, 2008   Last Updated: January 10, 2009

In today's real estate market, property values are volatile and if a property is in escrow, this volatility can create disputes over escrow deposits (or "earnest money") if a buyer cancels the purchase contract.

In real property transactions, it is rare for a court to enforce a contract onto a reluctant buyer; but if a buyer cancels the contract then a seller may claim the earnest money as a way to offset losses caused by the cancellation. In turn, a buyer may assert that a seller is not due the earnest money as the current value of the property made the contract no longer viable.

In this scenario, the outcome of the dispute may depend upon the timing of cancellation in relation to the contract's timeline.

For a valid contract, earnest money is not required. Yet, it is offered for three reasons: 1) show sincere interest to purchase by buyer; 2) demonstrate ability to finance the purchase; and 3) serve as possible liquidated damages to the seller in the event of default by the buyer.

A real property contract falls under contract law. All 50 states, including Arizona, adopted the Statute of Frauds as the standard for contracts in which interest in real property must be written to be enforceable [Arizona Revised Statutes 44-101(6)].

While the Statute of Frauds is a standard, the reality is that oral contracts are established in place of written contracts. An oral contract may be more difficult to enforce than a written contract, but it can be considered enforceable by a court if it was agreed upon by both parties and both parties used the contract to reasonable execute actions to convey the property.

It is also standard practice that a valid written or oral contract cannot be canceled without reasonable cause and the cancellation must be agreed upon by both parties.

A real estate contract becomes valid when the seller accepts the buyer's offer to purchase. At acceptance, the buyer has an equitable title in the property and the seller cannot offer the property for sale while the contract is in effect. The monies, including earnest money, are placed in an escrow account and the neutral third party which is the escrow company will disburse the funds in compliance with the contract to convey the property.

In the event of a dispute at cancellation, Escrow will not take sides and the funds will be held until the dispute is resolved and instructions are given to Escrow on how to disburse funds.

Because conveying real property is a complex transaction, the buyer can cancel the

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