Handling Escrow Disputes: Don’t Be a Cliché
By: Shannon L. Widman, Esq. of Porath & Associates, P.A.
No one wants to see a good deal go bad. As a Realtor® your business plan survives on closed deals, not cancelled deals. Nonetheless, the more deals you do, the more likely you will, at some point, encounter the dreaded escrow dispute.
Escrow disputes can take many different forms (e.g. inadequate repair dispute; special assessment dispute; performance dispute) but the dispute we see all too often is a disagreement over the earnest money deposit on a failed contract.
Conflicting Demands and Remedies
Best practices require clear, written instructions to the escrow agent from both parties directing release of the deposit. If the parties do not agree to whom the deposit should be paid, the escrow agent should look to the contract to take the next step. Escrow agents are not judge and jury. If there is a good faith doubt over who should receive the funds, the escrow agent needs to follow contract procedure. The contract procedure depends upon the contract used in that specific transaction.
The Residential Contract for Sale and Purchase approved by the Florida Realtors and The Florida Bar, affectionately known to all of us as the “FR/BAR”, can be used as an example. The FR/BAR addresses escrow disputes in paragraphs 13, 15, 16, and 17. These provisions provide the escrow agent with an option of remedies to dispose of the deposit. The remedies include non-litigious avenues such as arbitration and mediation, or in cases where the broker holds the deposit, a determination by FREC.1 These non-litigious remedies are not necessarily less expensive. Each require payment to attorneys for each party plus payment of a mediator and/or arbitrator depending upon the method.
An interpleader action with the courts is a common remedy used by escrow agents. This process provides the escrow agent with an avenue to remove itself from the dispute and have the court determine who receives the deposit. The deposit itself is placed in the court depository. Interpleader is a costly remedy for an escrow dispute, so all reasonable attempts to resolve the matter between the parties should be sought to give the parties the best possible chance of an amicable resolution prior to initiation of the suit. An ounce of prevention is worth a pound of cure.
The FR/BAR provides that the costs of the interpleader suit may be paid from the escrowed funds. Those costs include the filing fees, subpoena fees, court depository fees, and attorney’s fees for the escrow agent. The contract also contains a prevailing party provision indicating that the prevailing party’s attorney’s fees will be paid by the party that “loses” the case. Perhaps it is better to be right than to be happy in this case.
Is it worth it?
All of the fees and costs paid from the deposit could add up to more than the amount of the deposit itself, begging the question. We haven’t even touched on the attorney’s fees incurred by both buyer and seller in our scenario. Before your customer decides to chase good money after bad, ask your customer if they are prepared to spend more money than they might be awarded at the end. Ask them if they have the bandwidth to dedicate a significant amount of time and energy to a contested legal matter, rather than continuing with the marketing and sale of their home.
Should a real estate broker hold escrow?
A broker may accrue interest on the trust account holding escrow, so one might surmise that holding escrow is thinking outside of the box and a pretty good way to make a few extra bucks on the side.2 Cash is king, after all. Like any business, the more business you do, the more exposure you have and after a couple of deals go bad, you might ask yourself whether you are spending too much time on escrow management and too little time on sales, while exposing your brokerage to unwanted liability, and unintentionally opening a big can of worms.
What do I do if my customer gets into an escrow dispute?
The real question is what not to do. Do not give legal advice. Refer the customer to the contract itself and tell them they should run it up the flagpole and seek legal counsel to properly advise them of their legal options.
How do I avoid an escrow dispute?
Best way to avoid a dispute: manage expectations. Make a critical date timeline at the outset of the offer and share with the agent on the other side so all inspection and contingency dates are known and agreed upon. Be sure your seller is comfortable with accepting the offer with the stated deposit amount that should be commensurate with the contingencies and closing timeline proposed. This gives your deal the best chance for a successful closing. You can take that to the bank.
1.The Florida Real Estate Commission (“FREC”) provides an Escrow Disbursement Order (“EDO”) under certain circumstances outlined in Florida Statutes §475.25(1)(d)1.
- The Florida Administrative Code Chapter 61J2-14 lays out the rules that govern a real estate broker’s escrow procedure.