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Release of Earnest Money Deposit

Aug 5, 2016

Contract Issues

Question: My husband and I attempted to purchase a house in 2005 through our REALTOR®. We put down a $500 earnest money deposit. The deal fell through at the settlement table. The broker refused to give us our money back. The seller filed papers reserving the right to sue us, due to a supposed "breach of contract." We, in turn, contacted a lawyer, who responded with the legitimate reasons that the settlement did not proceed, including the fact that the seller "failed to provide all required statutory disclosures." The seller has not pursued this matter further.

We have been very patient over the past few years and have waited for the broker to return our money to us in full. We are contacting you in the hope that NVAR can inform us of any legal statutes and limits that would require the broker to refund our money without the use of the court system. However, we are willing to file a suit against the broker if necessary.

Answer: This is one of the three most frequently asked questions by members of the public who contact the Professional Services Department to complain about a REALTOR®. However, this question involves one of the areas that is outside the jurisdiction of NVAR and the Code of Ethics. The rules for releasing an earnest money deposit are governed by the state licensing regulations.

Brokers often are unfairly blamed in these situations for problems that are beyond their control. The state regulations contained in 18 VAC 13520180 B 1 (a) Disbursement
of Funds from Escrow Accounts prohibit a broker from releasing the earnest money deposit when a transaction falls through unless one of the following three conditions are met:

The first condition is mutual agreement of buyer and seller on the release of the money. The broker can assist clients by sending the other party a written Release of Sales Contract (NVAR K-1116) form and attempting to facilitate an agreement on the release of the earnest money deposit. However, the broker cannot compel his or her client to sign a release and should not be unfairly blamed if the client refuses to sign such a release. In some cases the client may be completely justified in refusing to sign a release, especially if the client wishes to preserve his or her right to sue the other party for failing to perform under the contract.

It also should be noted that brokers' signatures are not required for the release of the earnest money deposit. The real estate board regulations only require the signature of "all principals to the transaction." While the Release of Sales Contract provides signature lines for the listing broker and selling broker, these signatures are optional and not required for the release of the escrow account. These signatures are only required on the release form if the checkboxes for the listing company and selling Company in Section B 2 of the release form are marked "Yes." By checking yes, the brokers are releasing any potential claims against the parties arising out of the real estate transaction. The brokers' signatures are only required if one or more of the parties wish to condition their agreement to release the deposit on the broker's agreement to waive any and all claims arising out of this transaction. However, if the buyer and seller marked "No" prior to signing the form, then the deposit may be released without the signature of the brokers.

The second condition requires that one of the parties take legal action by filing a lawsuit against the other party to the transaction. It should be noted that the brokers are not a party to the sales contract and are acting as representatives of the parties in the transaction. The buyer or seller would have to sue the other, not the brokers, in order to receive the earnest money deposit. The broker is only holding the money as an escrow agent for the parties. In many cases, the earnest money is low enough that the parties can file a case in small claims court. Attorneys are not necessary in small claims court because the rules of procedure are designed to allow members of the public to present their own cases. If the amount is too large for small claims court, the parties may need the assistance of attorneys to file a claim through the general district or circuit courts.

Some brokers also will file an "interpleader" with the court. This allows the escrow agent with no interest in the earnest money deposit (or a broker who is waiving any claims to the deposit) to turn the money over to the court and allow the court to determine who is entitled to the money. This will allow a broker to wash his or her hands of a contentious dispute over an earnest money deposit, especially when one or more parties are acting unreasonably in the negotiations to release the deposit. This practice also can be effective if the broker has been holding a deposit for a transaction that fell through years or decades ago. This often is used when a broker is dissolving or merging a firm and wishes to resolve all of his or her outstanding cases. However, interpleading the funds with the court does require the broker to pay court costs and legal fees, which can make this a costly process.

The third condition is for the broker to send a broker's letter. If a broker believes the terms of the contract are "clear and explicit" regarding the entitlement to the earnest money deposit, the broker may send a letter to all the parties in the transaction. The Virginia Real Estate Board requires the broker to send a written notice to the party whom he or she believes is not entitled to receive the earnest money deposit. This notice must be hand delivered or sent certified mail return receipt requested with a copy to the other party.

This notice must state that a payment will be made to the other party in accordance with the clear and explicit terms of the contract unless a written protest is received from the party that would not receive the deposit within 30 days from delivery of the notice. The broker may send this notice by facsimile or e-mail if the recipient of the notice provides the broker with a fax number or e-mail address or if this information was provided in the original contract.

However, the broker cannot make this payment if the party files a written objection within 30 days of receiving this notice. For this reason the third option is not always successful in resolving these disputes.

It also should be noted that the broker cannot be compelled to send this letter, even by the written instruction of his or her client. The regulations specifically state that the broker is not required to make a determination about the clear and explicit language in the contract.
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