Notes from the Attorneys of the Massachusetts Association of REALTORS Legal Hotline

Q: My office recently put one of our listings under agreement and we held the deposit; however the buyer backed out at the last second, citing what he called improper repairs required under the contract. Now, the buyer is asking for their $11,000.00 deposit back, but the seller’s attorney has sent me a letter demanding that I release the deposit to the seller. The letter says that if I don’t send the funds they will sue me. Who is entitled to the deposit? Can they sue me? Do I need to file an interpleader?

A: Escrow disputes are an unfortunate byproduct of real estate transactions that do not come together. Until the end of the year 2000 brokers had been finding themselves named as defendants by buyers or sellers in escrow disputes, however this changed effective September 30, 2000 when one of the most effective tools in real estate brokerage was signed into law: An Act Prohibiting Certain Claims Against Escrow Agents.”

Under this law it is unlawful to name an escrow agent (real estate broker) as a defendant in disputes between buyers and sellers where the accepted offer or Purchase and Sale Agreement authorizes the escrow agent to continue to hold funds in the event of a dispute. Only if the agent violates his instructions is the agent able to be sued. This language is found in specific clauses in most standard real estate form contracts. For a sample of such language authorized callers can contact the MAR legal hotline at (800)370-5342. In your case it is unclear who is entitled to the disputed funds; however an interpleader is the last resort relative to a disputed deposit. There are many questions that need to be answered before anyone can determine who is entitled to the deposit and you should avoid making a legal determination.

Q: I am doing my year end books and realized I have been holding a disputed deposit for almost six months, how long is too long to hold the funds?

A: The state escrow regulations do not contain a time-period specifying how long you may hold the funds, actually if the parties have agreed to allow you to hold it pending mutually written instructions from the buyer and seller, or a court order, then you may hold it indefinitely per that agreement. This is the same agreement as referenced in the previous question.

Q. As the listing broker I recently placed a property under agreement and became the escrow agent in the transaction. The transaction has fallen apart and both parties are demanding I turn over the sizable deposit to them. What are my responsibilities to the parties in this transaction?

A. Escrow Disputes are an unfortunate byproduct to even the most successful real estate firms. The good news is that several years ago, at the urging of the Massachusetts Association of REALTORS®, the state legislature amended the General Laws to include a provision that protects escrow agents (the broker holding the funds) from being named as defendants in disputes between buyers and sellers where the accepted Offer or Purchase and Sales Agreement authorizes them to continue to hold the funds in the event of a dispute. To view a copy of this statue please visit: http://www.mass.gov/legis/laws/mgl/184-17a.htm. Most standard real estate contracts contain the necessary information in the escrow paragraph of the form, for example in the MASSFORMS™ Standard Purchase and Sale Agreement this language is contained in paragraph 4. For a sample purchase and sale agreement, please visithttp://www.marealtor.com/content/Legal_home.asp.

Q. Does Massachusetts law require that my escrow account be interest bearing?

A. No. Massachusetts regulation does not require that a broker’s escrow account be interest bearing. 254 CMR 3.00 (10) states as follows: An escrow account is an account where the broker deposits and maintains the money of other parties in a real estate transaction and such broker has no claim to such money. An escrow account may be interest or non-interest bearing but where it is interest bearing the broker must make a proper account of such interest at either the consummation or termination of the transaction.

Q. What are my record keeping responsibilities as a broker holding funds in an escrow account?

A. The regulation referenced in the above question goes on in section (b) to define the record keeping responsibilities of every broker who deposits funds in his/her escrow account. These records must clearly indicate the following: 1.) the date and from whom the broker received the money, 2.) date deposited along with the source of the money and check number, 3.) date of withdrawal with the name of the person receiving such withdrawal, 4.) other pertinent information concerning the transaction and shall clearly show for whose account the money is deposited and to whom the money belongs. The regulation goes on further to state that every broker shall also keep a copy of each check deposited into and withdrawn from the escrow account for a period of three years from the date of issuance. All such funds and records shall be subject to inspection by the Board or its agents.