A Note From The Legal Helpdesk: Earnest Money Issues
September 26, 2017
A fundamental part of a real estate purchase agreement is earnest money. Even though the actual amount of earnest money is often lower than the cost of litigation, disputes over earnest funds still occur. Below are some issues you may want to consider regarding earnest money.
Outdated Contract: Does your form contract simply acknowledge receipt of earnest money? How often has the seller actually received the earnest money when the seller signs a contract? On many contract forms, the provision dealing with earnest money harkens back to pre-digital days – with a simple acknowledgment that earnest money has been received, whether it has or not. If the buyer never transmits the earnest money and the contract simply acknowledges receipt, a contract is likely formed, but the seller might have to resort to the legal process to receive the earnest money. A better provision would set a deadline after seller’s signature for the buyer to transmit the earnest money and provide recourse to the seller for buyer’s failure to do so, such as unilateral termination of the contract. See the Alabama REALTORS® Purchase Agreement Form for a useful provision allowing the seller to cancel the Agreement if the earnest money check is rejected by the financial institution.
Acting as an Impartial Escrow Agent: For any given real estate transaction, different parties can act as escrow agent – the broker for the seller’s agent, the broker for the buyer’s agent, a non-realtor third party or as otherwise specified in the contract. When a real estate licensee acts as the escrow agent, the licensee has a fiduciary duty toward each party under the license law. If a dispute over the earnest money occurs and a party refuses to release the funds, a court will likely find the realtor in breach of the fiduciary responsibility for releasing the funds, even if one party seems clearly in the right. When a real estate licensee acts as an escrow agent, he or she should not release funds until 1) the parties agree in writing to release the funds, or 2) if the parties cannot agree, upon adjudication by a court of law. See Admin. Code R. 790-x-3-.03. When a lawsuit over escrow funds does occur, the escrow agent has a duty to notify all parties. See Fisher v. Comer Plantation, Inc., 772 So. 2d 455 (Ala. 2000).
Third Party Escrow Agents: Does your client or the other party wish for a non-real estate licensee to act as escrow agent or for the seller to receive the funds? As a real estate licensee, you are governed by the Alabama Real Estate License Law and accompanying regulations. If your client or the party on the opposite side of a transaction desires for someone other than a real estate licensee to have or hold the funds, remind your client that the Alabama Real Estate Commission can only enforce license laws related to escrow funds against real estate licensees.