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Legal IssuesGood faith money
There has been a spate of calls to the Legal HotLine asking who can hold the “good faith” money, and what should be done if someone other than the listing broker is tasked with that responsibility. In answering, we consider both the law, and the contract.
The law to which we look are the Rules and Regulations of the Real Estate Commission, specifically sections 321-328. Under the law, when a licensee receives money belonging to another, those funds must be deposited in a broker escrow account strictly governed by other rules and regulations with which most of us are very familiar. The broker who usually receives the money (or whose salesperson receives it) is usually the selling office who under the law would be duty-bound to maintain the deposit in the broker’s escrow account. It is a rare practice in Pennsylvania to have selling agents hold deposits, and these deposits are generally transferred along with the offer to the listing office.
The law does permit the transfer of deposits from the selling to listing office provided the buyer is informed of the transfer and signs a deposit money notice (form DMN) that clearly indicates that the funds will be transferred to the identified listing agent who will have the responsibility under the law to maintain the deposit.
While the law allows the listing and selling brokers to maintain the deposit, who will actually hold it is determined by contract. Look to PAR’s Standard Agreement, paragraph 3, which identifies where the funds will be held. The default found in the preprinted sections of paragraph 3(B) provide that the deposit will be held to the broker for the seller. This can be easily overwritten (stricken) and the name of the buyer’s broker can be inserted. As long as buyer and seller agree, it matters not whether the deposit is held by the listing or selling broker. The common practice in today’s market is for the listing broker to hold the deposit. There are times, however, when builder, attorney, title agent or other is selected by both buyer and seller to hold the deposit. Is this permitted?
The rules and regulations regarding the escrow only applies to licensees who receive money belonging to another. A buyer’s deposit could therefore be paid directly to the builder, title agent, attorney, etc. Is it advisable that a real estate consumer allow others to maintain deposits? Attorneys have legal and ethical obligations to which they subscribe that provide a framework by which escrowed monies are protected. Other professional (title agents, for example) may have legal and ethical rules within which they work as well.
Whether it is advisable to have sellers (builders) hold the deposit or other persons deserves great consideration. Will the money be held in a special account? Will it be there when the transaction closes? If the money is held by an interested party (the seller) and a dispute arises, what will happen? Obviously, there are greater dangers when deposits are held by parties not accountable to the law or contract with regard to the manner and means by which they maintain deposits. While we don’t make these decisions for our clients, we are in a position to educate them about the safety and reliability of the depository where the escrow is to be maintained. Brokers have been safeguarding deposits in well maintained escrow accounts for years and are in a good position to continue to do so.
Co-author: James Goldsmith, PAR Legal Hotline Attorney and General Counsel
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Brett Woodburn, Esq. is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. |
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