Contract to Buy and Sell, part 4: closing, possession, default, earnest money disputes, termination

Bottom line: closing day is when ownership changes hands. Before that, the contract says who must do what. If someone does not, the contract has remedies. And when buyer and seller both claim the earnest money, the holder is stuck in the middle, and the law says the holder must not decide.

Closing

Closing (also called settlement) is the meeting, or the e-signing, where the buyer signs the loan and sale documents, the seller signs the deed, money moves, and the deed is recorded. A closing company or title company usually runs it. Under Commission rules, the broker with a brokerage relationship in the deal is responsible for the proper closing. The broker must make sure the client receives an accurate, complete, detailed closing statement signed by the broker, and must attend the closing or be reasonably available (4 CCR 725-1 Rule 6.19.A and .C; C.R.S. 12-10-217(1)(j)). A broker must also not release or approve release of funds until they are usable, meaning available for immediate withdrawal (Rule 6.19.E; C.R.S. 38-35-125).

The deed the seller gives

A deed is the paper that transfers ownership. The contract says what kind. The common promise in a Colorado residential sale is a special warranty deed: the seller promises only that the seller did nothing during the seller's own ownership to damage the title. A general warranty deed promises more (back to the beginning of time). A quitclaim deed promises nothing. Check the Deed section of the contract you are using, since the form can be changed by the parties. The seller must also deliver the title policy the contract promises, and clear liens that the contract says must be paid.

Possession and holdover

Possession is the right to physically use the home and have the keys. The contract names a possession date and time, often closing day. A holdover happens when the seller stays past that time. Sellers who need extra days sign a short written rental or extended-possession agreement, usually with a daily payment and a deposit held back from proceeds. Without one, the buyer has legal remedies, but eviction is slow and costly. Brokers should never leave a holdover to a handshake.

Prorations

A proration splits a recurring cost fairly by days. The contract lists what is prorated (usually property taxes, homeowners association dues, rents, and water/sewer/utility bills if applicable) and the date to stop at, normally closing day. Closing then credits or charges each side.

Default and remedies

A default is breaking the contract without a legal excuse. The two main remedies:

• Liquidated damages: the parties agreed up front what a breach costs. If the buyer defaults and the seller picks this, the seller keeps the earnest money and the contract ends. It is the seller's cap.
• Specific performance: a court orders the breaching party to complete the sale. Real estate is unique, so a court can make a seller deliver this house.

On the standard form, if the seller defaults, the buyer can typically take the earnest money back and end the deal, or sue to force the sale or for damages. If the buyer defaults, the seller typically picks between keeping the earnest money as liquidated damages or suing. The form uses checkboxes for these choices, so read the version you have.

Mediation

Mediation means a neutral person helps the sides reach a deal. It is not a trial and the mediator decides nothing. The standard contract asks the parties to try mediation before suing, with limited exceptions. Check the exact Dispute Resolution section on the version in front of you.

Earnest money: delivery, holding, and release

A broker who receives earnest money must get it to the earnest money holder named in the contract and get a dated, signed receipt (Rule 5.12.A). If the brokerage itself holds it, the money must be deposited into the brokerage's trust or escrow account no later than three business days after receipt or mutual execution of the contract, whichever is later (Rule 5.7.B). Trust funds must be kept apart from the broker's own money (commingling) and must never be used for anyone else (diversion) (Rule 5.9, 5.10; C.R.S. 12-10-217(1)(i)). A broker must account for others' money within a reasonable time and keep records (C.R.S. 12-10-217(1)(h)).

When the parties fight over the earnest money

Both sides send demands. The holder is a stakeholder, a neutral keeper of funds. The holder must not choose a winner. The rules in the sources say money belonging to others cannot be used for the broker's benefit or another party's (Rule 5.9), and the broker must account for it (C.R.S. 12-10-217(1)(h)). In practice, the holder keeps the money in the trust account until one of these happens: both sides sign a written release, a court or arbitrator orders it, or the holder files an interpleader (asks a court to take the money and decide). The exact release wording is in the Earnest Money Dispute section of the contract. (Note: the Commission rules in our source file do not have a separate, stand-alone dispute rule; the process comes from the contract and general law.)

Notice to terminate and return of earnest money

When a buyer ends the contract using a right in it (inspection, appraisal, loan, title, and so on), the buyer sends a written Notice to Terminate before the deadline. Done right, the buyer is entitled to the earnest money back and the seller should sign a release. If the notice is late or the buyer had no right, the seller may claim the deposit.

Example with real numbers

A $500,000 Boulder County purchase has $10,000 in earnest money held at a title company. Closing is set for June 30. Closing statement proration lines, using June 30 as the cutoff:

1. Property tax: the annual tax is $3,650, which is $10 per day. The seller owes taxes for Jan 1 through June 30. That is 181 days in a non-leap year, 181 x $10 = $1,810. The seller pays this as a credit to the buyer, because the buyer will pay the full bill later.
2. HOA dues: $300 a month, paid for June by the seller. The buyer owns the home from June 30/July 1, so no credit is due for June, and July is the buyer's.

Now the default. The buyer misses the loan deadline, the lender denies the loan, and the buyer cannot close. The seller elects liquidated damages and keeps the $10,000. That is 2% of the price, which is the seller's total remedy. If the seller had elected specific performance and the buyer refused to close, a court could order the sale. The seller would then receive $500,000, less the buyer's earnest money credit.

Say instead the buyer sent a proper written termination before the inspection deadline, but the seller disputes it and refuses to sign the release. The title company holds the $10,000 and does nothing until a signed release or a court order arrives. It will not pick a winner.