WHO GETS THE DEPOSIT?

Winter Park Home, Volume 6 / Issue 4, 2008

In today’s real estate marketplace, many purchasers are reconsidering their offers, deciding to terminate their contracts, and seeking a return of their escrow deposit. These situations not only require a determination concerning the rights of the parties to enforce the contract provisions, but also often result in disputes over who is entitled to receive the earnest money deposit. Consider the following examples.

In August, 2007 David J. executed a contract to purchase a home for $500,000, and gave the Escrow Agent (the Seller’s attorney) a $25,000 earnest money deposit. The closing is scheduled for January of 2009. A recent appraisal reflects that the home is currently worth $375,000, not $500,000, and Mr. J. is looking for a reason to back out of the contract. The contract does not provide that that the house must appraise for the purchase price, there are no financing contingencies, and the property is being purchased “As-Is.” Mr. J. is not represented by an attorney.

In a second example, Mary Smith executes a contract to purchase a condominium unit, and gives the realtor a $10,000 deposit. There is no financing contingency, and Mary is unable to put together sufficient financing or cash to complete the purchase of the property. Mary requests a two-month extension of the closing date and the Seller, anxious to sell the condominium unit, agrees to the extension. Five days before the second closing date, Mary requests an additional contract extension. The Seller decides that this is a no-win situation. He refuses to sign an additional extension; advises Mary that he is ready, willing, and able to complete the closing; and, attends the closing at the scheduled time. Mary does not come to the closing. The Seller now requests a forfeiture of the entire $10,000 deposit.

Each of these examples requires an analysis and application of the deposit/escrow provisions of the contract. Clearly, both the Seller and the Buyer should consult with an attorney to determine their rights to the escrow deposit and their obligations under the contract. The Escrow Agent--the person or entity holding the escrow deposit--is generally authorized to disburse the escrow funds in accordance with the terms and conditions of the contract. In each of these examples, the disbursement of the escrow funds appears straightforward. The Escrow Agent typically will request that the Seller and the Buyer execute a release of deposit and termination of the Contract, and, once it is signed, will disburse the funds. If the parties cooperate, disbursement is made quickly. Often, one of the parties refuses to cooperate. This places the escrow agent in a position of being sued if the escrowed funds are incorrectly disbursed.

Standard Q of the FAR/BAR Contract for Sale and Purchase describes the proper disbursement of the escrow deposit. If there is no closing, the Escrow Agent must determine who is entitled to the deposit. To avoid being sued for improper payment, the Escrow Agent generally will have the parties sign a release and waiver establishing how the money is to be disbursed. If the parties don’t cooperate, the Escrow Agent can hold the deposit longer, while the Seller and the Buyer negotiate the proper payment. The Agent can also choose to file a lawsuit, known as an interpleader, in which the deposit is placed under the control of the court. The Seller and Buyer would then litigate ownership of the deposit. The court will take any filing fees and the Escrow Agent’s legal fees directly from the deposit, reducing the amount immediately available to the winning party. Although the court may ultimately award these fees to the winning party, there is no guaranty that the prevailing party will be able to collect the fee money from the other side.

Additional rules govern a real estate broker acting as an Escrow Agent, since brokers are governed by Chapter 475 of the Florida Statutes. A broker, in addition to filing an interpleader action, can also make a request to the Florida Real Estate Commission for a formal escrow disbursement order. Of course, each of these steps will delay final disbursement of the escrow deposit.

This analysis describes only part of the picture. In each of the examples, the Seller “appears” to be entitled to receive the escrow deposit. If the money is to be disbursed to the Seller, the Escrow Agent must also determine if the Seller signed a listing agreement, which typically provides that the real estate broker is entitled to a portion (typically 50%) of the surrendered deposit.

Once again, the Escrow Agent must disburse in accordance with the terms of all contracts. If there is any question as to the appropriate amount to disburse to the Seller and the Realtor, the Escrow Agent is well advised to obtain written authorization from each of the parties.

Initially, each of the Sellers in the examples I’ve described appears to be entitled to recover all or part of the escrow deposits. However, parties can be creative and many arguments can be made and questions raised that can present the Escrow Agent with genuine issues which can make determining who is to receive the deposit difficult. Before disbursing any escrow funds, the Agent should demand receipt of the properly executed releases in order to avoid potential wrongful disbursement suits.

Whenever there is any question about the proper disbursement of an escrow deposit, the Seller and the Buyer should each consult with his/her own real estate attorney. All contracts revolve around specific facts and the contractual obligations of the parties. An experienced real estate attorney can often examine a contract and determine that his client, who is otherwise ready to sign a release in favor of the other party, actually has a valid legal position justifying either a return or forfeiture of the deposit.

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.