What Happens to the Funds in Escrow if Your Deal Falls Through?
By: Sebastian Jaramillo, Partner at Wolfe Pincavage LLP and Member of The Fund
Even though we are in the business of getting transactions closed and funded; on occasion, the deal falls through and we are left with the question of how to deal with the funds held in escrow.
What Happens to the Funds in Escrow if Your Deal Falls Through?
By: Sebastian Jaramillo, Partner at Wolfe Pincavage LLP and Member of The Fund
Even though we are in the business of getting transactions closed and funded; on occasion, the deal falls through and we are left with the question of how to deal with the funds held in escrow. Both the FR/BAR-AS IS and Contract for Residential Sale and Purchase contain provisions regarding the duties of an escrow agent. When the parties cannot come to an agreement as to the release of escrow and both parties make conflicting demands for the funds, the escrow agent[1] may not release the funds to either party. Although an escrow agent should not release the escrow unless both parties sign a release, it is in the best interests of a party to promptly notify the escrow agent that they are making a claim on the escrow to avoid inadvertent disbursement. Regardless of who selected the closing agent, either party is free to decline to sign a release of escrow if they are not satisfied with the disbursement. Upon the receipt of conflicting demands, the choice of remedies will vary depending on whether the escrow agent is a broker. Both versions of the purchase agreement contain provisions that direct the parties to attend mediation to attempt to resolve the dispute.
If the escrow agent is a broker, the escrow agent must promptly: (1) request that the FREC determine who is entitled to the escrow funds; (2) file an interpleader action in Court; or participate in arbitration or mediation provided the parties agree to either form of dispute resolution. See Fla. Stat. § 475.25(d)(1). Although the statutory framework does not contain a timeline for the election of a remedy by the broker, it does specify that the agent shall “promptly” elect one of the remedies. Furthermore, if the parties agree to attend mediation, there is a requirement that the mediation be “… successfully completed within 90 days …” of receiving the last conflicting demand for escrow. See Id. Accordingly, the time period to resolve the dispute between the parties when the escrow agent is a broker is limited and the timeline must be taken into consideration when deciding how to proceed.
If the escrow agent is a title company or an attorney, and barring a successful mediation, the escrow agent is left with two options: (1) interplead the funds in Court to seek a judicial determination as to entitlement of the escrow, or (2) continue holding the funds pending settlement or consent to an alternate form of dispute resolution like arbitration. If the parties have failed to settle at mediation and cannot come to an agreement as to the release of funds, the escrow agent would typically file an interpleader action in order to be removed from the dispute. The amount of time that an escrow agent may be willing to wait to initiate an interpleader action will vary depending on each agent’s policies. It is common practice for an escrow agent to hold the funds if the parties are making progress toward a resolution.
On occasion, the deal may be disrupted when the escrow agent is already holding funds from lender and the down payment. Lenders will normally require that a closing agent agree to return the loan proceeds if the transaction does not close. Likewise, the down payment tendered by the Buyers will also be returned and pursuant to the terms of the contracts will not be subject to the procedures detailed herein.
Both versions of the contract and common sense, encourage the parties to come to an amicable settlement to avoid the cost of litigation. In the filing of an interpleader action, the escrow agent will be reimbursed from the funds in escrow for any attorney’s fees and costs incurred in such filing. This will inevitably diminish the amount of funds available to be distributed between the parties.
[1] If the escrow agent is a broker, the broker is required to promptly notify FREC of the escrow dispute upon receiving conflicting demands. Fla .Stat. § 475.25(d)(1).