Common Questions on Escrow answered by the staff of the MAR Legal Hotline.
Q: I am a licensed broker and I am acting as an escrow agent for a deal that recently fell through. I represent the seller, and the buyer backed out at the last second, citing what he called improper repairs required under the contract. The buyer is asking for their $11,000.00 deposit back, and 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?
A: Escrow disputes are an unfortunate byproduct of unsuccessful real estate transactions. Luckily, fifteen years ago, 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, typically a 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 all of MAR’s standard real estate form contracts. In your case, it is unclear who is entitled to the disputed funds; however, the escrow agent should never be the one to determine to whom the funds should be paid. There are many questions that need to be answered before anyone can determine who is entitled to the deposit. Ultimately, the parties, with the help from their attorneys, a judge, or an arbitrator, should make the decision as to whom escrowed funds should be paid.
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. In fact, if the parties have agreed to allow you to hold the funds pending mutually written instructions from the buyer and seller, or a court order, then you will have to hold it indefinitely per that agreement.