Who is entitled to the earnest money deposit if the buyer dies before closing?

QUESTION: I represent a seller who entered into an Offer to Purchase and Contract (Standard Form 2-T). The buyer paid a due diligence fee and a $2500 earnest money deposit. After the due diligence period expired but before closing the buyer unexpectedly passed away. The buyer’s executor has indicated that the estate does not intend to proceed with the purchase. My client has asked me if he is entitled to the deceased buyer’s earnest money deposit if the executor fails to close on the transaction. What should I tell him?

ANSWER:  While it may not seem just or moral for the seller to receive the buyer’s earnest money deposit in this context, it is nevertheless true that the seller is legally entitled to that deposit. There are several reasons for this outcome.

First, the law in North Carolina generally holds that executors and administrators are bound by all of the contractual obligations of their decedents, except those that are personal in nature. A contract of an author to write a book, or an artist to paint a picture are examples of “personal contracts” that are said to die with the person. Death makes the performance of those types of contracts impossible. As a result, executors and administrators cannot be held liable for damages based on their failure to complete personal contracts.

In contrast, a contract to purchase real estate is not a personal contract. Therefore, if an executor or administrator neglects or refuses to carry out the purchase contract of his or her decedent, the seller will have all the remedies for breach that are set forth in Form 2-T. That includes the seller’s right to terminate the contract due to the estate’s failure to complete Closing, and to recover the buyer’s earnest money deposit based on that breach of contract.

Paragraph 18 of Form 2-T provides additional support for this position. It states: “This Contract shall be binding upon and shall inure to the benefit of Buyer and Seller and their respective heirs, successors and assigns.” This language explicitly obligates the Buyer’s heirs and estate to honor all of the Buyer’s contractual obligations, including the obligation to complete the purchase in a timely fashion. If the estate fails to close, seller has the right to provide the buyer’s estate with a unilateral notice of termination and to request the release of the earnest money deposit.

Release Date: 5/2/2017; revised 10/01/2020

© Copyright 2017 - 2024. North Carolina Association of REALTORS®, Inc.

This article is intended solely for the benefit of NC REALTORS® members, who may reproduce and distribute it to other NC REALTORS® members and their clients, provided it is reproduced in its entirety without any change to its format or content, including disclaimer and copyright notice, and provided that any such reproduction is not intended for monetary gain. Any unauthorized reproduction, use or distribution is prohibited.

Filed Under: Contract Law,