If the buyer cancels, how are any deposits handled and what steps should I take to avoid breaching the contract? – North Carolina

Short Answer

Under North Carolina law, what happens to a buyer’s earnest money and any other deposits depends mainly on the written purchase contract and the reason and timing of the buyer’s cancellation. Standard North Carolina contracts usually treat the due diligence fee as nonrefundable and the earnest money as refundable only if the buyer terminates within a stated period or under specific contingencies. A seller avoids breaching the contract by promptly reviewing the written termination notice, following the contract’s instructions for releasing or disputing deposits, and documenting all communications with the buyer and the closing attorney or escrow agent.

Understanding the Problem

The question here is: when a buyer cancels a North Carolina real estate purchase contract, what happens to any earnest money or other deposits, and what can a seller do to avoid being the one in breach? In a typical residential sale, there may be a due diligence fee paid directly to the seller and earnest money held in a trust or escrow account. A seller may receive a call that a buyer has “terminated” and want to know whether any deposits must be refunded or can be claimed as damages, and what procedural steps are necessary so the seller does not violate the contract while responding to the termination.

Apply the Law

North Carolina relies heavily on the written contract terms to control how deposits are handled when a buyer cancels. Standard form contracts used in North Carolina distinguish between a nonrefundable due diligence fee (paid to the seller for the right to investigate and walk away) and earnest money (paid into a trust or escrow account as security for closing). State law on mandatory property disclosures also gives buyers a short statutory cancellation right in some situations, with a clear rule that any deposit must be refunded if that statutory right is properly exercised. Disputes over deposit release are usually handled through the closing attorney or escrow agent, and if the parties do not agree, the funds may remain frozen or be deposited with the court until a judge decides.

Key Requirements

Written contract controls deposits: The purchase contract sets out how the due diligence fee and earnest money are treated, when they are refundable, and what counts as a proper termination.
Proper and timely cancellation: For the buyer to recover deposits, any cancellation must follow the contract terms and, where applicable, the statutory timing and notice rules for certain disclosure-related cancellations.
Escrow handling and dispute procedure: Earnest money is typically held in a trust or escrow account; release or forfeiture must follow the contract and escrow instructions, and unresolved disputes can require a court action or formal release documents.

What the Statutes Say

N.C. Gen. Stat. § 47E-4 (Required disclosures) – requires residential property disclosure statements and owners’ association disclosure statements in most qualifying residential sales.
N.C. Gen. Stat. § 47E-5 (Time for disclosure; cancellation of contract) – gives a buyer a short window to cancel if required disclosure statements are not timely delivered and, if properly exercised, requires refund of any deposit paid.

Analysis

Apply the Rule to the Facts: The facts describe a seller who contacted the firm to ask whether a termination notice from a buyer had been received for a specific property, and the call was passed to an assistant for follow-up. Under a typical North Carolina contract, if the buyer sent a written termination within the agreed due diligence period or under a valid contingency, the earnest money would usually be refunded to the buyer, while the seller would keep any due diligence fee already paid. If the buyer canceled late or without contractual or statutory grounds, the seller may have a claim to the earnest money as contract damages, but release still requires following the trust account and escrow procedures in the contract, not unilateral action.

Process & Timing

Who files: Typically, no court filing occurs initially. Where: Communication runs between the buyer (or buyer’s agent), the seller (or seller’s agent), and the closing attorney or escrow holder in North Carolina. What: The buyer should send a written termination or cancellation notice that meets the contract’s requirements; the seller should obtain and retain a copy of that notice. When: Termination tied to contract deadlines (such as the end of the due diligence period or finance contingency) must occur by the precise date and time stated in the contract.
Once termination is confirmed, the escrow holder (often the closing attorney or a brokerage trust account) reviews the contract and any release instructions. If both sides sign an earnest money release or otherwise agree in writing, the escrow holder disburses the funds as directed, usually within a short administrative timeframe that can vary by office.
If the parties disagree about who should receive the earnest money, the escrow holder typically continues to hold the funds until the dispute is resolved. Resolution can occur by a later written agreement between buyer and seller, mediation or other alternative dispute resolution if required by the contract, or a lawsuit in the appropriate North Carolina trial court, after which the court’s order governs who receives the deposit.

Exceptions & Pitfalls

If required property or association disclosures are not timely provided, North Carolina law can give the buyer a short statutory cancellation window with an automatic right to a refund of any deposit if the buyer’s written notice is properly and timely delivered.
Misreading or overlooking exact contract deadlines is a common mistake; a late termination, even by hours, can change whether the buyer is entitled to earnest money back or whether the seller can claim it as liquidated damages.
Unilateral instructions to an escrow holder to release earnest money without the other party’s written consent or a court order can put the escrow holder in a difficult position and may delay closing on a resale; careful, written directions that match the contract help avoid this problem.

Conclusion

In North Carolina, the purchase contract largely controls what happens to a buyer’s deposit when a buyer cancels, with statutory disclosure rules adding a narrow, separate cancellation and refund right. Typically, the due diligence fee remains with the seller, while the earnest money is refunded or forfeited based on how and when the buyer terminates. To avoid breaching the contract, a seller should confirm any written termination, follow the contract’s escrow and release procedures, and, if needed, pursue a written deposit release or court guidance rather than acting unilaterally.

Talk to a Real Estate Attorney

If a buyer has canceled a North Carolina real estate contract and there are questions about earnest money or other deposits, our firm has experienced attorneys who can help clarify the contract terms, deadlines, and next steps. Call us today at 919-341-7055.

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.