Buyer Deserves a Chance To Make Good on Bad Check

Q: We have been trying to sell our condominium for several months. Our real estate agent finally presented us with a contract. Although the price was lower than we were hoping to get, we decided to accept that offer.

Relying on that, we entered into a contract to buy another property. Our buyer had a contingency for a home inspection, which was done to his satisfaction. He specifically advised our agent that he was removing the contingency.

A few days later, we learned from our agent that the earnest-money deposit was returned by the bank for insufficient funds. There is another person who has now expressed interest in our condominium and has presented us with an offer at a higher price.

What can we do?

A: Your agent must immediately advise the buyer about his bounced check and give him five business days to make it good. The agent should advise the buyer that if it isn't made good, he will be in default and that you will sell the property to the third party.

If the third-party offer is acceptable, you should sign it, but make it clear that this is a backup contract. You or your agent should advise the third party of all of the facts, because full disclosure will help head off litigation.

You should consider using this language. "BACKUP CONTRACT: This contract is a first backup to a contract dated (date). This contract shall become the primary contract immediately upon delivery of notice from the seller that the other contract is void. The rights and obligations of the parties under the primary contract are superior to the rights and obligations of this backup contract."

The first contract is technically in breach. That contract required the buyer to post good funds as the earnest money deposit, and obviously the funds are not there. However, it would be unfair for you to unilaterally terminate the contract without providing the buyer the opportunity to cure the default.

It may be that it was an honest mistake. It is also possible that the bank made an error -- it does happen. Or it may be that the buyer got cold feet and arranged to have no money in his checking account.

Regardless of the reason, you must advise the buyer of the problem and give him the right to make his check good. Otherwise, you could find yourself in nasty litigation.

Let me pose a follow-up question. What if that buyer takes no action to redeem the check, but refuses to sign a release? Can you sell the unit to the third party?

Brokers and lawyers often differ on this. The real estate industry takes the position that a release is mandatory. Lawyers will often allow the sale, depending on the facts and circumstances of each case.

If the first buyer has been given adequate notice and an opportunity to make good, and if the buyer has not filed a lawsuit seeking specific performance from the court, your title remains free and clear (subject of course to any mortgage you may have that will be paid from the settlement proceeds).

In order for a buyer to put a cloud on your title, he not only has to file the specific performance lawsuit, but he also has to file a "lis pendens" on the land records against your condominium unit.

"Lis pendens" is Latin meaning "suit pending." When that document is filed with the local recorder of deeds, it puts the world on notice that title to your property has been challenged.

Obviously, if the first buyer has not made good on the deposit check, you will win your case. If you have to go to court, you should counterclaim against that buyer for damages: the loss of that third-party contract, plus the money you have paid for your mortgage, real estate taxes and condominium fees since the lawsuit was filed.

But litigation is time-consuming and expensive. If that buyer sues you for specific performance, he has to represent that he is "ready, willing and able" to buy your property. If that is really the case, your best option is to agree to sell it to him, even though his price was less than the third-party offer.

In the long run, settlement of legal disputes makes the most sense. My definition of a settlement is simple: Both sides walk away unhappy, but nevertheless walk away.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.