BEST OF THE HOTLINE: Return of deposits in 365 days

By James L. Goldsmith, Esq.

BACKGROUND: That part of Paragraph 23 of the Standard Agreement (ASR) having to do with the return of deposits was amended in the last several years to reflect changes in the Real Estate Licensing and Registration Act ("RELRA"). The legal changes expand brokers' rights to divest themselves of disputed escrow funds. Now, a broker may disburse deposits that are in dispute according to a distribution agreement by and between seller and buyer reached before the dispute arose. In Paragraph 23, the ASR incorporates such a distribution of disputed escrow plan that says if a dispute arises and that dispute has not been placed into suit within one (1) year of the original settlement date, then the Buyer, by written request, may seek a return of the entire deposit amount. In the years since its implementation, anecdotal reports suggest that this provision is working quite well.

Of course, there are those among us who find that when something works well, it can work even better. Why should a broker hold deposits for a year if the timeframe can be shortened to 90 days, 60 days, one week . . .? This is the subject of this Q&A.

Q: Can the pre-printed 365 days found in Paragraph 23 of the Standard Agreement be reduced substantially so that a broker is not holding disputed escrow funds for a whole year?

A: Yes, the number of days, 365, is pre-printed atop an underline to suggest that it may be changed. As per Paragraph 5(E) of the Standard Agreement, "Certain terms and time periods are pre-printed in this Agreement as a convenience to the Buyer and Seller. All pre-printed terms and time periods are negotiable and may be changed by striking out the pre-printed text and inserting different terms acceptable to all parties."

So, why was 365 days selected as the waiting period and what should you consider if making a change? The first thing to keep in mind is that this is an agreement between the buyer and seller. Any decision is to be theirs. Your suggestions are appropriate provided the suggestions are designed to advance the interests of your client rather than your own.

The 365 days was selected because it is neither too long nor too short a duration. We all know the problem with too long. I know broker who have held once-disputed deposit funds for over 20 years! Some of you consider holding idle funds in an account for even a year to be too long.

So what is too short? I consider 90 days to be far too short. Keep in mind that the settlement date written into the contract at Paragraph 4(A) is the date the counting begins. When a settlement date is missed, there is usually a period of time when the parties are negotiating and hoping to salvage the transaction. This period of uncertainty can last weeks and even months. With a 90-day window, the seller may be pressed to file suit in order to prevent the deposit funds from being released to the buyer. This requires making an appointment to meet with a lawyer. It may signal an intent to terminate ongoing negotiations and it requires the jumping through hoops that occasions the filing of a lawsuit.

A seller who loses a deposit because of a short-time period, or a seller who is forced to litigate early in the dispute, may eventually blame you who suggested altering this time period. Why select a time that puts so much pressure on the parties and causes them to seek legal counsel when a longer waiting period might allow tempers to cool so that an amicable resolution can be achieved? What was your rationale for suggesting the shorter time? If it was to unburden your office from holding a disputed escrow, then you have put your own interest ahead of your client. Did you discuss this conflict of interest when you made the suggestion to your party to shorten the time? If you are familiar with RELRA, then you know that it provides that all conflicts of interest have to be disclosed.

I am not sure there is a lawyer out there who would agree to a 60 or 90-day period to be used in lieu of the standard 365 days. (I imagine that if there are, I will hear from them!) Understanding the legal process, allowing time for amicable resolution and the preparation of filing of a complaint if need be are all reasons why I favor the full 365 days. The burden of holding a deposit for a year is relatively light and only should be tinkered with if the parties, knowing how it will affect them, give their consent.


Mr. Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. He may be reached at realcompliance.com.