Trust Deposits and Interest
Since the implementation of REBBA 2002, the Registrar’s Office has received a number of inquiries with respect to trust deposits and the payment of interest. REBBA 2002 does not require brokerages to have an interest bearing trust account.
However, with respect to these inquiries, Section 27 of REBBA 2002 includes two relevant subsections:
27 (2) Brokerages shall fully and clearly disclose in writing to a person depositing trust money the terms on which the brokerage deposits the money, including whether the money is deposited in an interest bearing account and the interest rate that the brokerage receives on the money.
27 (3) Unless otherwise provided by contract, all interest on the trust money referred to in subsection (1) shall be paid to the beneficial owner of the trust money.
Subsection (2) makes it clear that brokerages must fully disclose to persons depositing money the interest terms that apply to the brokerage’s account. Subsection (3) indicates that in the absence of a contractual agreement, all of the interest shall be paid to the beneficial owner of the trust money.
Scenarios
Non-Interest Bearing Trust Account – REQUIRES DISCLOSURE
If a brokerage places a deposit into its real estate trust account and the account is non-interest bearing, the brokerage is required to disclose in writing that the brokerage’s financial institution does not pay the brokerage any interest on the real estate trust account. Consequently the beneficial owner of the trust money will not receive any interest. In such event, acceptable language is:
“The parties to this [Agreement of Purchase and Sale/Agreement to Lease/Option/Etc.] hereby acknowledge that the Deposit Holder shall place the deposit in trust in its non-interest bearing real estate trust account and no interest shall be earned, received or paid on the deposit.”
Payment of All Interest Earned – REQUIRES DISCLOSURE
If a brokerage places a deposit into its real estate trust account and the real estate trust account earns interest, the brokerage is required to disclose in writing the terms on which the brokerage deposits the money, including the interest rate that the brokerage receives on the money from the brokerage’s financial institution. If the beneficial owner of the deposit is to earn the same interest rate as the brokerage earns on the deposit, acceptable language is:
“The parties to this [Agreement of Purchase and Sale/Agreement to Lease/Option/Etc.] hereby acknowledge that the Deposit Holder shall place the deposit in trust in its interest bearing real estate trust account, which earns interest at XX % per annum, and the Deposit Holder shall pay any interest it earns or receives on the deposit to the beneficial owner of the trust money at the same rate of interest the Deposit Holder earns or receives on its real estate trust account.”
Payment of Interest at a Rate Less Than Earned – REQUIRES CONTRACT
Rather than simply disclose the interest rate and pay the accrued amount to the beneficial owner of the trust money, some brokerages have chosen to focus on the exception to entitlement and drafted contracts for the acceptance of the parties to the real estate transaction which discloses the interest rate the brokerage earns and a lower rate of interest to be paid to the beneficial owner of the money. In such a situation, acceptable language is:
“The parties to this [Agreement of Purchase and Sale/Agreement to Lease/Option/Etc.] hereby acknowledge and agree that the Deposit Holder shall place the deposit in its interest bearing real estate trust account, which earns interest at XX % per annum, and the Deposit Holder shall pay interest at a rate of YY % on the deposit to the beneficial owner of the trust money. The parties to this [Agreement of Purchase and Sale/Agreement to Lease/Option/Etc.] hereby acknowledge and agree that the Deposit Holder shall be entitled to retain the difference between the interest earned on the deposit and the agreed rate of interest payable.”
Payment of Interest Earned Less a Fee – REQUIRES CONTRACT
Rather than simply disclose the interest rate and pay the accrued amount to the beneficial owner of the trust money, some brokerages have chosen to focus on the exception to entitlement and drafted contracts for the acceptance of both parties to the real estate transaction which discloses the interest rate the brokerage earns and creates a minimum payment threshold for the brokerage. In such a situation, acceptable language is:
“The parties to this [Agreement of Purchase and Sale/Agreement to Lease/Option/Etc.] hereby acknowledge and agree that the Deposit Holder shall place the deposit in its interest bearing real estate trust account, which earns interest at XX % per annum, and the Deposit Holder shall pay any interest it earns or receives on the deposit to the beneficial owner of the trust money, provided the amount of the interest that the Deposit Holder earns or receives on the deposit is equal to or greater than $XXX.xx. The parties to this [Agreement of Purchase and Sale/Agreement to Lease/Option/Etc.] hereby acknowledge and agree that the Deposit Holder shall be entitled to retain any interest earned or retained on the deposit, which is less than $XXX.xx.”
To comply with the brokerage’s obligations under REBBA 2002, contractual terms need to provide clear disclosure about the account’s interest terms and be clear about how the interest associated with deposits will be disbursed.
Contractual terms should be contained in the Agreement of Purchase and Sale or a schedule to the Agreement. Regardless of where they appear, each of the parties must sign the document and each must receive an executed copy.
