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Legal Issues, Standard FormsMyths surround deposit money
PAR staff has recently seen an increase in the number of questions regarding the handling of deposit monies. Let’s look at some of the common myths about deposits and set them straight.
Myth #1: “A buyer must make a deposit for an Agreement of Sale to be binding.”
Not true. Contract law says there must be “consideration” for a contract to be binding. In essence, each party has to have some skin in the game. But consideration in a real estate contract is generally the mutual promises made by the parties – the seller promises to transfer the property to the buyer and the buyer promises to pay the purchase price to the seller. The deposit is a mechanism that (theoretically, at least) shows a buyer is serious about the deal but it isn’t consideration. One might argue that a listing broker isn’t adequately protecting the interests of his seller by counseling the seller to accept an offer with no deposit but that’s a practice issue rather than a legal requirement.
Myth #2:  “The option to keep deposits as liquidated damages harms sellers because deposits are so low.”
While this may be true in areas where deposits are low, the fault does not lie in the text of the agreement. In some areas of the state it is common to have larger deposits – sometimes as much as 5-10 percent of the sales price – paid in two to three stages during the transaction. In short, if a listing broker feels that the deposit offered by a buyer is insufficient to protect the seller’s interests in a transaction, the broker can counsel the client to demand a higher deposit as a condition of accepting an offer.
Myth #3: “Deposit disputes can’t be mediated under the mediation paragraph of the Agreement of Sale.”
I was shocked when I first heard this and continue to be shocked as it is repeated. The mediation paragraph has stated for many years that it applies to “all disputes or claims that arise from this agreement.” Since deposit money disputes certainly “arise from” the agreement there is no reason why they couldn’t be mediated. Just to make that crystal clear, the 2010 Agreement (paragraph 23) now states that mediation applies to “all disputes or claims that arise from this agreement, including disputes and claims over deposit monies….”
Myth #4: “If the parties don’t agree to a release of the deposits I’ll have to keep them in my escrow account forever.”
This was true until late last year when a change to the Real Estate Licensing and Registration Act (RELRA) went into effect. This change allows the buyer and seller to agree to a contract term that instructs brokers how to distribute the funds if the parties can’t resolve a dispute. Paragraph 22(C) of the 2010 Agreement now states that if the parties have a deposit money dispute that isn’t resolved within a year of the stated closing date, the broker holding the deposit monies will distribute them to the buyer after receiving a written request to do so unless the dispute is in litigation. This should encourage sellers who feel they have a valid claim to the deposits to move forward with mediation and, if no settlement is reached, to litigation within a year rather than letting the deposits linger with the broker.  For more detailed information on how this works, see the Guidelines for Preparation and Use on the PAR web site.
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Hank Lerner, Esq. is the Director of Professional Practice at the Pennsylvania Association of Realtors®. |
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Ron:
Just use the link in the last line of the article. That will take you to the page with all our form samples, and you can click on the clink for the Guidelines (listed as Form GDE). This is a resources published for use only by PAR members. If you’re a member you’ll need to login with your username and passord, or set one up.
Hank,
Reference Myth #4. I have an interest in this topic, how can I acquire a reference copy of the “Guideline for Preperation and use of the ASR (2010)” (GDE)?
Thanks
I’ve heard the “no money-no contract” point for a long time. Thanks for the clarification from a legal point of view.
Good question, Toby. In contracts like this the legal consideration is the mutual promise to perform (exchanging money for property). If the parties agree to waive some or all of their enforcement/damage options as part of the contract that is likely not going to affect the analysis of whether consideration exists.
Of course none of this is to suggest that it is a good idea to counsel a seller to accept an offer without a deposit, and you show one scenario which makes that point. But there’s a huge difference between incorrectly telling a buyer’s agent “I’m not showing this to my seller because it’s not a legal contract” on the one hand, versus presenting the offer to your seller and telling her “Although you could sign this if you want to my professional advice is that you’d be putting the transaction at risk if you don’t demand a deposit as part of the contract.”
Hank – a question on Myth #1:
If there is No deposit and AND default clause 22.(G)is elected so Seller is limited to “liquidated damages” of $0.00, does the Buyer still have “skin in the game”? If Buyer can walk without cost, is there still “consideration”?
Thanks