Is It Yours or Mine?
What to Do When Buyers and Sellers Disagree Over Deposits
In this issue of You Asked Us, we’re focusing on deposits – specifically, on whether licensees should use a contract clause to clarify who is entitled to the deposit if a deal collapses. Read on to find out why a brokerage can’t rely on a contract clause to release a deposit it is holding in trust.
Q: I read an article recently that recommended that buyers’ agents should include a clause in the Contract of Purchase and Sale stating that the seller agrees to return the deposit if the deal doesn’t go through. Should I start including a clause like that in my contracts?
A: While a clause like the one you’ve described may seem like a simple way to avoid potential disagreements between sellers and buyers about the return of a deposit, in fact, it is not sufficient and could cause more complications for both parties and for the brokerage.
Here’s why you shouldn’t rely on a clause in the contract about the return of deposits:
- When a brokerage holds a deposit in trust, they do so as a stakeholder, not as an agent for one of the parties to the trade in real estate.
- If the trade is not completed, the brokerage can only release the deposit money if they have obtained a separate written release from both the buyer and the seller authorizing them to do so.
- If there is a dispute regarding the payment of the deposit and one or more of the parties will not sign a release, the brokerage or one of the parties may apply to have the funds paid into court.
- In the event of a dispute, it is up to the courts, not the brokerage, to interpret any terms in a contract including terms relating to the return of a deposit.
The Council cautions licensees against trying to draft a clause for the release of the deposit within the Contract of Purchase and Sale. We also caution brokerages not to assume that a clause in a contract is sufficient authorization for a brokerage to release a deposit without a separate written agreement.
A lot can change between when two parties enter into a Contract of Purchase and Sale and when a contract collapses. By obtaining a separate written release at the time the deposit is to be released, the brokerage is assured that both parties agree about how the deposit is to be disbursed. If one of the parties will not sign the release, that should be a red flag that there may be a difference of opinion about who is entitled to the deposit. Even if the terms of the contract seem clear, there may be adverse claims that require legal interpretation.
If the parties can’t come to an agreement, the brokerage may apply to the Supreme Court for an order to pay the money into court. Sometimes, advising the buyer and seller that going to court is the only option available if the parties are not able to come to an agreement is just the sort of encouragement the parties need to break their stalemate.
To learn more about the return of deposits, see: