When a potential seller agrees to enter into a definitive agreement for the sale of its financial institution, the closing could still be months away due to regulatory approvals and other conditions that must occur prior to inking the final documents. Since there are a number of potential issues that could arise between the date of signing and closing, sellers often want some form of compensation in case the deal collapses prior to closing. After all, the seller will be out professional fees at a minimum if closing does not occur. Even worse, the failed sale could result in reputational harm and the potential erosion of the buyer pool. Based on these risks, sellers often require buyers to make an earnest money payment that the seller would be entitled to keep if the deal falls through. However, sophisticated buyers need not view this earnest money payment as a nonrefundable deposit, and in fact, often have the opportunity to negotiate conditions upon which the seller will return the earnest money payment.


Although the parties are free to negotiate the amount of the earnest money payment, a seller will often ask for an amount that will cover most professional fees and serve as a deterrent to the buyer’s simply walking away from the transaction. A typical earnest money dollar range for many community bank deals is between $50,000 and $150,000, depending upon the specifics of the proposed transaction. Although the parties could choose to place the earnest money in a neutral account at a third party, they often choose to place the funds in a joint account at the seller’s institution. The parties then address in the definitive agreement the conditions upon which the earnest money will be released. Such an arrangement is common and saves the administrative expenses associated with a third party escrow agent holding the earnest money and the related legal expenses of drafting a separate escrow agreement to govern the release of the earnest money.


If the transaction goes as planned, the parties will proceed to closing and mutually agree to release the earnest money and accrued interest to the seller with a corresponding credit to the purchase price for the buyer. This scenario is by far the most common. However, the parties should consider other events that result in a release of the earnest money, many of which occur when the deal falls apart. Considering alternative release triggers is not an optimistic task, but such consideration is an essential step in drafting a thorough definitive agreement. A sampling of the additional triggers resulting in the return of earnest money to the buyer follows:

  • Seller’s Breach: If the seller breaches a representation, warranty or covenant set forth in the definitive agreement, most would agree the earnest money should be returned to buyer. This arrangement is the default in most definitive agreements.
  • Real Estate Issue: Most buyers will reserve the right to perform additional diligence if they will acquire real estate from the seller as a result of the transaction. This diligence typically includes conducting an environmental assessment, obtaining title commitments, and conducting a survey. If this real estate diligence uncovers material issues that seller cannot cure, the definitive agreement often contains a provision permitting termination by buyer. However, under these circumstances, should the earnest money be returned to buyer? Seller could take the position that the real estate issues were unforeseeable and buyer should forfeit the earnest money to help offset seller’s transaction and reputational losses. However, buyer likely has the better argument that between the innocent parties, seller was in position as owner to remedy the real estate issues and should therefore forfeit the earnest money.
  • No regulatory approval: Similarly, if the regulators do not approve the sale, should seller be entitled to retain the earnest money? This question is one of the most negotiated points of the earnest money provision because reasonable minds can differ on who should be entitled to the earnest money under these circumstances. Often the seller is successful in structuring the definitive agreement such that seller will keep the earnest money if buyer fails to obtain regulatory approval, unless such failure was clearly the result of seller’s actions or condition. However, since regulatory approval is less certain in the post-recession era, a growing number of buyers are successfully demanding the return of the earnest money in the event regulatory approval is not granted.


Although a buyer should be receptive to seller’s request for an earnest money deposit upon signing the definitive agreement, the buyer can counter with a negotiated clause explaining under what circumstances the earnest money will be retained by seller or returned to buyer.