Although it’s not a requirement, earnest money is involved in many real estate transactions in Alabama. Unfortunately, it’s also the subject of many questions and disputes. So, AAR’s Legal Team has created this article to review the basic requirements for earnest money, as well as what to do in the event of a conflict. If you have questions and are an AAR member, please contact the Legal Line.

Note: This article is for information only and is not intended as legal advice. If you need legal advice, please contact a qualified attorney.

Earnest Money Basics

In Alabama, earnest money is not required to submit an offer to purchase. Nonetheless, many buyers choose to submit earnest money in connection with a purchase agreement to demonstrate the buyers’ good faith in completing the transaction. If the sale successfully closes, any earnest money will be applied toward the purchase price of the property. But, if the contract terminates, Alabama has specific regulations about disbursing earnest money.

Many aspects of earnest money are negotiable. For example, whether the transaction will include earnest money at all, and if so, how much are both negotiable. The consumers can also negotiate when earnest money is due and who will hold it.

If the buyer agrees to submit earnest money, it’s important that you and the buyer carefully read the Purchase Agreement and understand its requirements related to earnest money. The buyer should pay close attention to the earnest money deadline: many purchase agreements (including both of AAR’s Purchase Agreements) allow the seller to terminate the contract if earnest money isn’t timely delivered. 

Terminated Contracts

If the contract closes, the consumers typically never think twice about earnest money. But, if the contract is terminated, disputes about earnest money can arise quickly and be fierce. The requirements for disbursing earnest money when a contract has failed depend on whether the person who’s holding the earnest money is a real estate licensee or not.

Licensees

Alabama license law allows qualifying brokers to hold earnest money in trust while a transaction is pending. If a qualifying broker holds the earnest money and the contract is terminated, the qualifying broker may only disburse the earnest money if 1) the parties mutually agree about how to disburse it in writing or 2) according to the terms of a court order.

It’s important to understand that the language of a purchase agreement does not satisfy the requirement that the parties agree in writing about how to disburse earnest money. Rather, the parties to the purchase agreement must execute a separate written release for the qualifying broker to be able to disburse the earnest money. Some purchase agreements specify what’s supposed to happen to earnest money if certain events occur. Even if this is the case, a separate mutual release is still required. In Alabama, the language of a purchase agreement can’t overcome the need for a signed mutual release if the money is held by a qualifying broker. If the parties can’t come to an agreement regarding the mutual release, the qualifying broker will need to take further action (see below).

Non-Licensees

Individuals who don’t hold a real estate license, such as closing attorneys, aren’t bound by license law’s requirement for a mutual release. This means that while they can choose to require a mutual release, they can also choose to disburse earnest money without a mutual release. If you’re interested in having a non-licensee hold earnest money, AAR highly recommends getting their disbursement policies and procedures in writing first.

Interpleader

If the consumers can’t agree about how to disburse earnest money, the only other way license law allows the funds to be released is through a court order. This typically happens through a legal action called an interpleader. Interpleader is an option when a dispute arises involving two or more parties who argue over property held by a disinterested third-party. In the case of earnest money, the broker is the disinterested third-party, who requests that a court determines how to disburse the earnest money.

The Alabama Rules of Civil Procedure (ARCP) are the procedural rules governing civil actions in Alabama and contain the rule on interpleader. The benefit of interpleader is that, when properly done, the party holding the funds receives a discharge of liability after depositing the disputed funds with the court. So, the REALTOR® stuck in the middle can meet his or her legal obligations, bow out of the dispute, and get back to business. From there, the court will consider the language of the purchase agreement, the circumstances of the agreement’s cancellation, etc., and determine how to disburse the money.