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Funds in Escrow: Whose Money Is It?

Written by on Sunday, 03 March 2002 6:00 pm
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Q: We recently signed a contract to purchase a house, and thought we were smart enough to insist (over the real estate broker’s objections) on having the contract contingent on our obtaining – at our expense – a satisfactory home inspection. We selected the home inspector, and paid for the inspection.

There were a number of problems which were discovered during the inspection. We tried to negotiate with the seller, but she refused to make any concessions. Finally, we declared the contract null and void, as we had the right to do under the inspection contingency clause in the sales contract, and asked the real estate agent to refund our $10,000 earnest money deposit.

The agent has refused, claiming that the seller is not willing to release the funds.

Is the agent correct? There is no valid sales contract, and we see no reason for withholding of our deposit. What should we do?

A:Unless the seller changes her mind, you may have to file a lawsuit in order to get your deposit back.

The dictionary defines the word “escrow” as “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.” The important words here are “held in trust”. Basically, this means that when someone – whether it be a real estate agent, your own attorney, or a title company – holds money in escrow, the escrow holder cannot release the funds without receiving specific written instructions from all parties to the transaction. The funds are held “in trust” for the benefit of both parties.

In your case, the real estate broker is holding $10,000 in escrow. You truly believe that you have the right to those funds because you opted out of the contract based on the inspection contingency clause. However, your seller probably believes otherwise. Perhaps your seller does not believe that you obtained a valid home inspection. Or perhaps your seller believes that you waited too long in which to raise your objections. Most inspection contingencies contain very specific time limitations – i.e. you must complete the inspection and report any problems to the seller within X number of days or the inspection contingency becomes null and void.

Regardless of the seller’s reasons, the escrow holder has a fiduciary duty to both buyer and seller, and cannot unilaterally release the funds unless there is a written document authorizing how the funds are to be disbursed.

You should immediately prepare a request for disbursement of the escrow funds, sign it and present it to the real estate broker for signature by the seller. I suspect that the broker has such a form in his files. You should also review your sales contract carefully to determine if you are entitled to recover attorneys fees should you have to file suit to get your money back.

In the United States, our courts follow what is known as the “American Rule on Attorneys Fees”. This means that in most cases, each party to a lawsuit has to pay their own legal fees, even if they are successful in the litigation. There are some important exceptions to this rule:

  • where a statute (federal, state or local) provides that the prevailing party will be entitled to reasonable attorneys fees. Examples are State Consumer Protection laws, or Anti-Trust laws;
  • where the parties agree in writing that attorneys fees would be available in the event of litigation. Examples are real estate rental leases, or some sales contracts;
  • where the Judge feels that the conduct of one party to a lawsuit is so egregious that the Court is compelled to award legal fees to the other side.

Did you use the Regional Sales Contract currently in use in the Washington Metropolitan area? If so, take a look at paragraph 26, entitled default. Buried in this paragraph you will find the following language:

If either the Seller or Purchaser refused to execute a release of Deposit when requested to do so in writing and a court finds that they should have executed the agreement, the party who so refused to execute a release of Deposit will pay the expenses, including, without limitation, reasonable attorney’s fees, incurred by the other party in the litigation.

This is perhaps one of the most important provisions in any real estate sales contract. If this clause is contained in your contract, you should contact your attorney, and have him/her send a demand letter – with a release signed by you – to the seller, requesting that she sign the release and return it to the real estate broker. Your lawyer should recite, verbatim, the provisions of paragraph 26 above, to alert the seller that should she refuse to sign – and you prevail in Court – she will have to pay your attorneys fees, as well as her own attorney.

But before you embark on the litigation trail, have you personally talked to the seller? Do you know why she is balking at releasing your funds. Perhaps she has a valid reason, or perhaps you can convince her that she is wrong. Clearly, communication is an important element of any real estate sales contract, and most people would rather reach an amicable agreement outside of Court than be faced with a lengthy – and expensive – Court battle.

The escrow agent certainly can assist you in attempting to reach a resolution, but your escrow agent cannot unilaterally release the deposit to anyone at the present time.

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  About the author, Benny L. Kass

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.