Q: We recently entered into a contract to buy our first home. Our contract contained two contingencies: 7 days in which to obtain a satisfactory inspection of the house, and 30 days to obtain financing. We completed the inspection and removed the first contingency. However, there were a couple of blemishes on our credit record of which we were not aware, and now we have been rejected for a loan. However, we did not count the days carefully and our rejection came after the 30 days contingency period was over.

The seller has threatened to keep our $15,000 earnest money deposit. Can they do this?

A: There are two important lessons to be learned from this experience. First, read your contract carefully before you sign it, and second, make a calendar of significant dates so that you will meet every possible deadline contained in your contract.

Sellers do not like to enter into real estate contracts which contain too many contingencies. A contingency is an event – such as a home inspection – which if unsatisfactory to the buyer, gives that buyer the absolute right to back off from the contract and get a refund of the earnest money deposit. Indeed, some buyers instruct their real estate agent not to even deposit this check until after the home inspection contingency has been removed.

Another contingency commonly found in real estate contracts deals with financing. In your situation, you had 30 days in which to obtain financing. If you were unable to get a firm loan commitment and notified the seller of this fact – within the 30 day period – the contract would be null and void.

But what happens as you approach the end of this 30 day period if you have not yet obtained a loan? The prudent thing to do is to obtain an extension of the contingency period from the seller. This extension must be in writing, signed by both buyer and seller. If the seller objects, and does not want to grant any extensions, the buyer can then take the position that the contract is no longer in effect because a loan had not been obtained within the contingency period.

My experience is that in most cases, if sellers believe that a loan will, in fact, be forthcoming shortly, they will grant a brief extension. Indeed, some form real estate contracts will automatically grant the extension, if a lender advises the seller that the loan looks good and should be available shortly.

But, none of this happened. You obviously did not count the days, and it appears that your contingency period has expired.

Read your sales contract carefully. If you need assistance, talk to your attorney. Keep in mind that $15,000 of your money is now at risk. Some sales contracts specifically state that if the buyer does not remove the financing contingency within the specified number of days, that contingency is automatically removed and the contract remains in full force and effect. Thus, you either have to buy the house or be in default of the contract.

Other contracts – including the Regional Sales Contract in use in the Washington metropolitan area – are not as strict. The Regional contract allows the contingency to continue beyond the initial period of days, and gives the seller the option of cancelling the contract at any time should financing not be available.

(NOTE: this is found in paragraph 9 of the Regional Sales Contract, and is very convoluted. The Greater Capital Area Association of Realtors (GCAAR) was instrumental in promulgating this form contract, and while there are many good sections in the contract, the financing contingency has been the subject of much debate and much confusion since it was issued a few years ago.)

Let us assume that under the terms of your contract, you are in default of that contract. Generally, however, when a buyer is in default, a seller has three options:

First, the deposit can be forfeited in favor of the seller.

Second, the seller can sue the buyer for what is known as specific performance. This means that the seller can take you to court and ask the judge to require that you purchase the house. Obviously, many facts have to be determined before a seller will make the decision to file suit. If you could not get financing, what’s the point of taking you to Court? If the seller is successful in Court, will you really have the ability to go forward with the transaction? If the answer is no, this remedy is impractical for a seller.

Finally, a seller can sue the buyer for damages. If, for example, your contract with the seller was for $175,000, and when the seller puts it back on the market it can only sell it for $150,000 -- despite diligent efforts on the part of the seller -- the damages are $25,000 and the court may award a judgement against you in this amount. When a seller sues for damages, the courts may also award the party who did not breach a contract such other damages as carrying costs (i.e. mortgage and tax payments), and loss of the use of the money before the house finally sells.

However, there is no cash register at the back of the Courthouse. Obtaining a legal judgment in a court of law may be much easier than collecting on that judgment.

Litigation is both time consuming and expensive. It is also full of uncertainty. Before you are sued, try to discuss the situation with your sellers. Perhaps the seller will lend you the moneys you need to complete the sale; perhaps they will give you more time in which to find a loan.

Also, discuss your situation with your lawyer. Make sure that you are really in default. Are there any other contingencies in your contract? Are there any other technical loopholes in the contract which can be used as justification that you are not in breach? Was “time of the essence” a part of your sales contract?

If you are unsuccessful in the litigation, will you also have to pay the seller’s legal fees? Once again, you have to go to the contract for the answer.

Our Courts follow what is known as the “American Rule” regarding attorneys fees. Unless there is a specific provision in a contract, or there is a specific statute on the lawbooks allowing one side to recover attorneys fees, each side will have to pay their own lawyer. It should be noted that the Regional Sales Contract does contain language (in paragraph 23) that the prevailing (successful) party in litigation will be entitled to recover reasonable attorneys fees from the losing party in a court suit.