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Professional Standards Manual

Trading Services

2. Acting For Sellers

(f) Deposits - View Entire Section

(XI) Deposit To Be Held by Someone Not Regulated under RESA

[updated September 2015]

The parties may agree that one of the parties’ lawyers, a notary public, accountant, or indeed anyone that the parties mutually agree upon, is to receive the deposit. This agreement should be detailed in the Contract of Purchase and Sale. However, if a cash deposit is to be given to a licensee so that that licensee can deliver the cash to the person who is to hold it, another step is necessary.

Section 27(4) describes that additional step. It requires that the seller and buyer enter into a separate written agreement which essentially relieves the licensee and the related brokerage of their obligation to deposit the money into the brokerage’s trust account. Once this separate written agreement has been executed, and the deposit clause in the Contract of Purchase and Sale has been properly amended, the licensee must ensure that the deposit is delivered to the person who is supposed to receive it.

NOTE: Following amendments to RESA in 2015, unless the money received is cash, a separate written agreement is no longer required, so long as the brokerage takes no action in relation to the money other than to deliver it to the person to whom it is payable. If the money is cash, a separate written agreement is still required.

To demonstrate, assume that the seller and buyer have agreed that a deposit of $1,000 is to be held by the seller’s lawyer Joe Smith. Randy Ready of ABC Realty, the buyer’s agent who is drafting the contract on behalf of the buyer, has agreed to deliver the deposit to Joe Smith. Paragraph 2 of the ‘‘standard’’ Contract of Purchase and Sale states, in part, the following:

‘‘2. DEPOSIT: A deposit of $1,000, which will form part of the Purchase Price, will be paid on the following terms:All monies paid pursuant to this section (Deposit) will be delivered in trust to [Name of the Party to Hold the Deposit] and held in trust in accordance with the provisions of the Real Estate Services Act.’’

The seller’s lawyer is not licensed under RESA and takes his instructions from the seller. He is not obliged to hold the deposit “in trust in accordance with the provisions of the Real Estate Services Act.” Therefore, the deposit clause should be amended as follows:

‘‘2. DEPOSIT: A deposit of $1,000 which will form part of the Purchase Price, will be paid on the following terms: within 24 hours of acceptance of this offer.

All monies paid pursuant to this section (Deposit) will be delivered in trust to the Seller’s lawyer, Joe Smith. The Seller will provide irrevocable instructions to Mr. Smith to hold the Deposit in trust in accordance with the provisions of the Real Estate Services Act.’’

In this scenario, the deposit cheque should be made payable to ‘‘Joe Smith, In Trust.’’ No separate written agreement is necessary if the licensee is only to deliver the deposit cheque to the lawyer. If  the deposit in this scenario is in the form of cash, a separate written agreement under section 27(4) of RESA is still required, and that separate written agreement should contain the following components:

Agreement Under Section 27(4) of the Real Estate Services Act (where money is to be held by someone who is not a licensee)

Dated:

Re:(‘‘Property’’)

Between:(‘‘Seller’’)

and:(‘‘Buyer’’)

and:(‘‘Brokerage’’)

With respect to the Contract of Purchase and Sale dated(Contract) in respect of the Property, the Seller and Buyer agree that(Licensee), is not required to deliver monies received from the Buyer or Seller pursuant to the Contract to the Brokerage pursuant to section 27(1) of the Real Estate Services Act nor is the Brokerage required to deposit those monies in its brokerage trust account pursuant to section 27(2) of the Real Estate Services Act.

Signed:

Seller

Buyer

Licensee on behalf of the Brokerage

Deposit To Be Held by Another Licensed Brokerage Not Otherwise Involved in the Trade

Some brokerages have entered into service agreements with another brokerage whereby the second brokerage (the ‘‘Holding Brokerage’’) agrees to hold deposits in relation to trades involving the first brokerage — the ‘‘Service Brokerage’’. In these circumstances, section 7-1.1 of the Rules requires that there be a separate written agreement under section 27(4) of RESA wherein the parties agree that the deposit will be paid to the ‘‘Holding Brokerage’’. Section 7-1.1 of the Rules also requires that the ‘‘Holding Brokerage’’ deposits the money into a separate brokerage trust account maintained in the name of the ‘‘Service Brokerage’’.

To demonstrate, Randy Ready is licensed with ABC Randy Realty, which has entered into an agreement with ABC Big Realty to provide trust accounting services for ABC Randy Realty. When Randy writes offers, the deposit clause reflects this, but Randy typically agrees to deliver the deposit cheque when received.

In this scenario, because the deposit is to be held by another brokerage, that brokerage is governed by RESA. If other deposit details are the same as in the first scenario, the Deposit clause should read as follows:

‘‘2. DEPOSIT: A deposit of $1,000 which will form part of the Purchase Price, will be paid on the following terms: within 24 hours of acceptance of this offer.’’

‘‘All monies paid pursuant to this section (Deposit) will be delivered in trust to ABC Big Realty and held in trust in accordance with the provisions of the Real Estate Services Act.’’

In this scenario, the deposit cheque should be made payable to ‘‘ABC Big Realty, In Trust’’. The separate written agreement required by section 27(4) of RESA should contain the following components:

Agreement Under Section 27(4) of the Real Estate Services Act (where money is to be held by a holding brokerage)

Dated:

Re:(‘‘Property’’)

Between(“Seller”)

and:(‘‘Buyer’’)

and:(‘‘Brokerage’’)

With respect to the Contract of Purchase and Sale dated(‘‘Contract’’) in respect of the Property, the Seller and Buyer agree that(‘‘Licensee’’), is not required to deliver monies received from the Buyer or Seller pursuant to the Contract to the Brokerage pursuant to section 27(1) of the Real Estate Services Act nor is the Brokerage required to deposit those monies in its brokerage trust account pursuant to section 27(2) of the Real Estate Services Act but that the monies will be delivered to(‘‘Holding Brokerage’’) for deposit in a trust account established by the Holding Brokerage.

Signed:

Seller

Buyer

_ Licensee on behalf of the Brokerage

Deposit To Be Held Pursuant to the Real Estate Development Marketing Act

When the trade involves a development unit, as defined under the Real Estate Development Marketing Actsection 18 of that legislation applies. Section 18(1) of the Real Estate Development Marketing Act states that: ‘‘A developer who receives a deposit from a purchaser in relation to a development unit must promptly place the deposit with a brokerage, lawyer, notary public or prescribed person who must hold the deposit as a trustee in a trust account in a savings institution in British Columbia.’’

Deposits are held as a trustee under the Real Estate Development Marketing Act, which is different from how they are held as a stakeholder under RESA. One of the significant differences is that there are certain triggering events which, when they occur, oblige the trustee to release the deposit to the developer. This release takes place without the type of signed agreement of the parties required under RESA.

There is a link in the wording between RESA and the Real Estate Development Marketing Act with respect to the treatment of deposits. RESA requires that deposits received by a brokerage under section 18 of the Real Estate Development Marketing Act be dealt with in accordance with the Real Estate Development Marketing Act.

If the ‘‘standard form’’ Contract of Purchase and Sale is used for a trade related to a development unit that is subject to the provisions of the Real Estate Development Marketing Act, the phrase in the deposit clause shown in scenarios 1 and 2 above that states the deposit will be ‘‘… held in trust in accordance with the provisions of the Real Estate Services Act’’ essentially means the deposit must be held in accordance with the Real Estate Development Marketing Act.

Therefore, brokerages which hold deposits related to trades that are subject to the Real Estate Development Marketing Act should familiarize themselves with the requirements of that legislation. Further information is also available on the Financial Institutions Commission website www.fic.gov.bc.ca by following the links ‘‘Real Estate > Frequently Asked Questions’’.

It is also important to recognize that scenarios 1 and 2 above also apply to trades that are subject to the Real Estate Development Marketing Act. If a licensee is going to hold or receive a deposit which the parties have agreed will be delivered to and held by someone other than that licensee’s related brokerage, a separate written agreement must be obtained.

Other Requirements Where the Deposit Will be Held by Someone Other Than a Licensed Brokerage

One other issue was that licensees had not advised their clients to seek legal advice where the deposit was not to be held by a brokerage under RESA. The Council recommends that licensees advise clients to obtain such advice in any circumstance where a deposit is going to be held by a third party other than a real estate brokerage, including by one of the parties to the transaction.

Licensees should confirm such a recommendation to the seller or buyer by inserting one of the following clauses into the Contract of Purchase and Sale:

Legal Advice re: Deposit Clause

(name of Seller or Buyer) hereby acknowledges that (name of licensee) has advised them to obtain independent legal advice before signing or accepting this contract with respect to the arrangements for holding the deposit money in this transaction.

OR

Lawyer Approval of Deposit Arrangement Clause

Subject to the (select either Seller’s or Buyer’s) lawyer approving on or before (date) the arrangements for holding the deposit money in this transaction.

This condition is for the sole benefit of the (select either Seller or Buyer) .

Ω If not using the standard form Contract of Purchase and Sale, refer to ‘‘Contracts under Seal’’.

If the deposit is not in the trust account of a brokerage but rather in the account of a lawyer/notary, then the licensee must confirm in writing, with the signatures of all parties to the contract, that the deposit is being held by the lawyer/notary as a ‘‘stakeholder’’ and not in trust for one of the parties to the transaction.

Licensees should be aware that some developers have created their own form of Contract of Purchase and Sale for specific projects. Some of these contracts contain specific clauses directing that a buyer’s deposit is payable directly to the developer or their legal representative and not to the brokerage’s trust account.

If the developer is to hold the deposit, licensees should advise buyers that a developer governed by the Real Estate Development Marketing Act is not permitted to hold a deposit and the clause should be amended accordingly.

Refer to the sections entitled ‘‘Real Estate Development Marketing Act and New Construction’’ for further information.

Authorization To Pay Trust Money to Conveyancing Lawyer or Notary

The ‘‘standard’’ Contract of Purchase and Sale addresses deposits and states, in part:

The party who receives the Deposit is authorized to pay all or any portion of the Deposit to the Buyer’s or Seller’s conveyancer (the ‘‘conveyancer’’) without further written direction of the Buyer or Seller, provided that: (a) the conveyancer is a Lawyer or Notary; (b) such money is to be held in trust by the conveyancer as stakeholder pursuant to the provisions of the Real Estate Services Act pending the completion of the transaction and not on behalf of any of the principals to the transaction; and (c) if the sale does not complete the money should be returned to such party as stakeholder or paid into court.

The effect of this wording is to allow the brokerage that holds a deposit in trust as a stakeholder to for ward these funds to the conveyancer, without having to obtain a separate written release from both the seller and the buyer. The following sample clause is intended for use in contracts that are not drafted on the ‘‘standard’’ form.

Conveyancer as Stakeholder Clause

The brokerage that receives money in connection with this transaction is authorized to pay such money to the Buyer’s conveyancer, provided that such money is to be held in trust by the conveyancer as stakeholder pursuant to the provisions of the Real Estate Services Act, pending the completion of the transaction and not on behalf of any of the principals to the transaction, and should the sale not complete, the money should be returned to the brokerage as stakeholder.

Agreed to by Seller:

and Buyer:

There are two important issues to note:

  • This pre-authorization only applies to a release of funds to a lawyer or notary. It does not apply to the release of funds from trust for any other reason or to any other party.
  • This clause does not bind the conveyancer to hold the funds in trust as a stakeholder pursuant to the provisions of RESA because the conveyancer is not a party to the Contract of Purchase and Sale. An agent who releases funds to a lawyer or notary under this authority must still clarify the stakeholder role directly with the conveyancer. This can be accomplished by using the following sample wording in a covering letter to the conveyancer:

Authorization To Pay Trust Money to Lawyer or Notary Clause

Enclosed is $ (amount) being the deposit money in the above-noted transaction. This money is to be held by you until completion on the following trust conditions:

1. you will hold this money as a stakeholder pursuant to the provisions of the Real Estate Services Act and not on behalf of any of the principals to the transaction;

2. upon completion you will disburse the money as provided in the Contract of Purchase and Sale and, should the sale not complete, you will, upon request, repay the money to us in trust as stakeholder; and

3. if you are unable to comply with these trust conditions, you will return the said money to our office.

Regardless of who is acting as the stakeholder, the following clause should be used to clarify the obligations of that stakeholder:

Third Party Holding Deposit Clause

The deposit will be held in trust by (name of third party, e.g., conveyancer/notary/builder) as a stakeholder pursuant to the provisions of the Real Estate Services Act pending the completion of the transaction.