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Returning Disputed Deposits

This week we’ve received many calls about deposit money, here is a recent article from Hank Lerner, Esq. regarding this subject:

Returning Disputed Deposits

By: Hank Lerner, Esq. on  in 

Some of the most common PAR Legal Hotline questions are about the process for returning disputed deposits, found in paragraph 26 of the Agreement of Sale.

Let’s walk through that process, step-by-step. For the purpose of this article, we’ll refer to the number of days in paragraph 26(C) as “X” (as in “if there is a dispute over entitlement to deposit monies that is unresolved X days after…”). One day later is X+1, five days later is X+5, etc.

  • Obviously, if the buyer and seller settle their dispute prior to X, the broker will release the funds as directed and this provision is irrelevant.
    • There is no specific time period for this in the law or the form, so the broker must release funds within a reasonably appropriate time period.
    • Remember that there is no requirement for the parties to sign any specific form (such as the PAR release), so long as they have both indicated to the broker that the dispute has been resolved.
  • If the dispute is unresolved, at any time after X+1 the broker will return the deposit to the buyer…
    • IF the buyer has made a written request that the funds be returned, AND
    • IF the broker has NOT received “verifiable written notice of litigation or mediation prior to the receipt of buyer’s request for distribution.”
    • Return must be within 30 days of receiving the request (presuming there has been no notice of mediation or litigation).
  • Where a party wants the deposit to be held until the dispute is resolved, that party must file for mediation (required by the terms of the agreement unless modified) or litigation and provide “verifiable written notice” of the filing prior to the receipt of the buyer’s request for distribution.
    • “Verifiable written notice” means written notice that an action has actually been filed. This might include a copy of the mediation request form sent to the local association or a copy of the association’s notice to the non-filing party. A threat to file an action in the future is not sufficient.
    • The notice must be delivered to the broker prior to the buyer’s request for distribution (Have I said that yet?). If the buyer’s written request comes in on X+5, but the seller doesn’t notify the broker until X+7, it’s too late. The broker holding the escrow should certainly tell the seller when funds are being distributed under this provision, but a later filing/notice should not stop distribution.
    • Once the notice has been received, the funds must be retained until there’s an agreement between the parties (mediated or otherwise) or a court order. If mediation fails the broker must hold on to the money until the dispute is settled, just like in the old days.
  • Distribution under this clause does not prevent either party from taking further action – it just means the money is no longer in the broker’s escrow account. For example, if the deposit is returned on X+10 the seller can still file for mediation a month later – the only difference is that the funds are in the buyer’s account instead of the broker’s account.
  • Consider all of the above when negotiating X down from the default number of 180 days if you think that’s too long. Buyers might think they’d love X=5 because the seller would probably not get around to filing for mediation in such a short time period. But such a short time period could push the seller to file so quickly that the parties don’t have enough time to negotiate back and forth on a resolution.

As always, the hotline is here to help PAR members puzzle through your contract questions. But many questions can be handled through a careful reading of the forms or these sorts of articles, so you may save some time by taking a spin on PARealtors.org before you call.