Broker of Record Corner: Returning deposits in failed transactions: what you need to know about your responsibilities

Whether your brokerage is on the buying or selling side of the transaction, it’s always disappointing when a deal falls through. But it’s important to remember that brokerages holding a consumer’s deposit money in trust have significant responsibilities. This includes a legal duty to observe a high standard of care and to act impartially when dealing with potential beneficiaries of that money.

We spoke with Peter Hoffman, owner and broker at Royal LePage Triland Realty, Brokerage and RECO Director, to get his take on some of the challenges faced by brokers of record when it comes to deposits. Read on to find out what your responsibilities are after an agreement falls through.

How can deposit funds be released after a failed agreement?
A brokerage can only disburse the deposit in accordance with the terms of a mutual consent or release signed by both the buyer and seller or from a court order. There are exceptions that apply in certain specific situations.

If the deposit has been held in trust by the brokerage for two years and it’s unclear or has not been determined to whom it should be paid, then the brokerage must forward the deposit and all relevant paperwork to RECO.

If the identity of the person entitled to the money held in trust is known, but that person cannot be located after one year has passed and after the brokerage has made reasonable efforts to contact them, then the brokerage must forward the deposit and all relevant paperwork to RECO. In either case the brokerage must also provide to RECO what information it has about who is entitled to the funds.

For more information about these exceptions, please check out RECO’s Registrar’s Bulletin entitled Failed Agreements of Purchase and Sale and Section 27 of the Real Estate and Business Brokers Act, 2002.

Don’t the brokerages involved have to sign the mutual release or consent?
The short answer is no. Many brokerages use the OREA Mutual Release standard form when releasing funds after a failed agreement. While that form has a spot for both brokerages to sign the release, their signatures are not required for the deposit money to be disbursed. If the buyer and seller indicate in a mutual consent that the trust money shall be disbursed, the brokerage is obligated to release the funds as directed, even if the brokerage doesn’t agree.

What if there is a dispute over the release of the deposit?
Chances are, if you are representing the buyer, their main priority is to get back into the market and look at more homes after a failed agreement. But it’s important to remember that typically, the alternative to mutual consent by all parties is a court order determining who is legally entitled to the deposit, which could in fact be the seller, not the buyer.

“Being the buyer in a failed agreement situation can be extremely frustrating. With the money tied up in the trust account, it can really impact some buyers’ ability to continue searching for a home,” says Mr. Hoffman.

But, there are ways of mitigating that impact. Mr. Hoffman mentions that in some cases, a buyer may want to offer the deposit payment in stages. “The buyer will submit a smaller deposit along with their offer and provide a second larger deposit once the conditions in their offer have been met. This can help to eliminate buyers’ concerns that they will be sidelined should something go wrong.”

What if the buyer or seller retains a lawyer?

Brokers of record may find themselves on the receiving end of a phone call or letter from a lawyer representing either the buyer or seller, indicating that the funds are to be released. It’s usually not that straight forward, and as mentioned above, deposits can only be released through mutual consent by all parties, usually the buyer and seller or through a court order, subject to the specific exceptions mentioned above. When in doubt seek legal advice.

For more information

RECO has a Registrar’s Bulletin entitled Failed Agreements of Purchase and Sale on our website that explains the process of releasing a deposit after a failed agreement. You may find it helpful to share this resource with clients or other parties that may be looking for guidance about how to proceed after a deal falls through.

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