Have you ever had a failed transaction where the parties disputed who should get the deposit? I’ll bet you have, and if you haven’t, you will.
Paragraph 26(C) of the PAR Agreement of Sale addresses how brokers holding escrow deposits will deal with them if there’s a dispute over deposits that the buyer and seller don’t resolve after a certain number of days. Though we explained this process in great detail in a 2020 article and it’s been the subject of any number of presentations and discussions over the years, we get a number of Legal Hotline calls with “creative” interpretations of this provision. A standard warning has been that a “creative” broker who fails to follow the specific steps laid out in this provision could find themselves on the wrong end of a complaint to the State Real Estate Commission under the theory that they mishandled escrow funds by not following the terms that that parties agreed to in the contract.
That was just a theory for the longest time, but now it’s actually happened – a broker has been sanctioned by the commission for not following the rules laid out in that section.
Broker S represented the seller and held the escrow deposit. A different broker represented the buyer. The buyer terminated the Agreement of Sale based on their failure to secure financing, though they had waived the mortgage contingency. The seller, believing that they had a strong claim to keep the buyer’s deposit (which they probably did), refused to release the deposit back to the buyer.
That’s cool. The buyer and seller have a dispute, and the starting point for escrow disputes is that the broker holds the money until something happens that would authorize them to release it. But keep reading…
After a few weeks, Broker S got a sternly worded letter from the seller’s attorney instructing the broker to NOT release the deposit until the buyer and seller were able to resolve their dispute. There may have been other communications between the brokers, attorneys and parties after that, but at no point did either party file for mediation or litigation. The dispute lingered with no resolution, and therefore Broker S never got “verifiable written notice” of active mediation or litigation.
After the time period in Paragraph 26(C) had expired, the buyer sent a letter to Broker S requesting that the deposit be returned. At that point, to quote from the consent agreement filed in the case, Broker S “did not release [the deposit]… given the competing demands of the parties…” According to Broker S, they “determined that the best course was to maintain the deposit” until the parties resolved their dispute, in part because they felt that the buyer’s termination was not supported by the terms of the contract.
That’s where the problem arises.
Again, quoting from the consent agreement: “as there was a prior written agreement as to the issue of the entitlement to escrow,” the broker “was not required… to retain the escrow and was required to account for this escrow deposit” according to the terms of the Agreement of Sale. By which they mean that since the Agreement of Sale said that the broker should release the deposit at the buyer’s request after a certain period of time if no mediation or litigation had been filed, then that’s exactly what the broker should have done. Breaking it down even further, “I’m going to file” is not sufficient – the filing must already have occurred.
The broker was issued a public reprimand and assessed about $500 for investigative costs. No additional fine/sanction was imposed, but this disciplinary result will be attached to the broker’s licensing record in PALS regardless of the amount of the sanction. And of course, there’s no guarantee that another broker in another case with different facts wouldn’t face a harsher sanction – especially now that the brokerage community should be on notice that this is something the commission is looking at.
One big lesson here is “more reading, less thinking.” Acknowledging that forms language can always be improved and clarified, between the clause itself and the explanatory documents PAR provides there should not be much space to misunderstand the intent of this clause. Our experience is that problems arise when brokers, agents, clients and outside attorneys try to do their own analysis of a dispute instead of just going by the words on the page.
For example, it’s pretty common to hear something like “I’m not going to release the deposit to the buyer because there’s no way they’d win in court.” That’s not a thing. Brokers don’t get to judge which party seems to “deserve” the deposit – plus the terms the parties have already agreed to are meant to dictate how the deposits are handled. It doesn’t matter what anyone thinks of the relative merits of the parties’ positions – what matters is whether either of them have actually filed the paperwork to start the mediation or litigation process and provided notice of that fact to the broker holding the deposit.
We’ll also hear from listing brokers who have determined that they’re going to hold deposits because it’s “in their client’s best interests” or because they feel the clients didn’t have sufficient time to get their mediation paperwork filed. That also doesn’t work. Again, the parties have already agreed to terms so the broker cannot determine to ignore those contract instructions. And to be blunt, since the time period in that paragraph is negotiable one might suggest that listing brokers should take a look at how they advise their clients on what timeline they agree to. It takes time to try to resolve disputes and/or to file for mediation, so listing agents may want to talk with clients about avoiding super-short time frames here.
There are also plenty of attorneys out there who believe that some sort of demand letter, as was sent in this case, is sufficient to keep the money in escrow. Again, that’s not what the contract says, and a request/demand by one party is not sufficient to unilaterally change the terms that the parties have agreed to.
The Post-Credits Scene
Like any good saga, here’s the last little teaser. The last line of that paragraph says, “buyer and seller agree that the distribution of deposit monies based upon the passage of time does not legally determine entitlement to deposit monies, and that the parties maintain their legal rights to pursue litigation even after a distribution is made.”
If the buyer gets the deposit returned, they have not “won” the deposit – they just have it back in their bank account while the seller decides whether to pursue another remedy. A seller who believes they have a strong position could still file for mediation, and because this is definitely a dispute that arises from the Agreement of Sale, the buyer should be obligated to mediate under paragraph 27. And if no mediated agreement is reached, the seller could still sue. Understanding that the seller is not losing any rights or remedies upon release of the funds may help refocus a seller’s attention away from the urge for a “creative” interpretation and back to pursuing whatever valid remedies still exist.