By Dennis Irwin
Just because the pond looks inviting on a hot and humid day, don’t dive in, ignoring the warning signs, until you know what lies under the surface. The pond may have hidden dangers lurking right below the surface that you’re not aware of. Do not ignore the possible dangers for the benefit of a little pleasure.
In my opinion, this describes the clause that Vito Campanale recently wrote about in REM. He feels this clause can solve the problem of sellers not releasing the deposit to the buyer who wants out of the transaction.
“The Seller agrees in the event that the Buyer does not waive the conditions within the dates and times as set out in this agreement and its amendments, the Seller gives the Deposit Holder, the Brokerage or other Party holding the deposit an irrevocable direction to release the deposit to the Buyer without the necessity of a Mutual Release signed by either Party.”
I apologize for the length of this article but I believe we must dissect the complete clause in detail, (including historical and legal) in order to consider the pros and cons before its use. This clause is not just about the return of the deposit but reaches over into possible legal issues. Remember, look below the surface for hidden dangers before jumping in head first.
This clause has been developed in response to a rare situation where a seller will not return the deposit on a contract. We don’t know the reason this has happened, but often it is due to the seller being unclear or misunderstanding the contract, which is easily resolved with a bit of legal advice. The second and most common reason is the buyer has, or appears to have, breached the terms or intent of the contract and the seller demands compensation.
Realtors need to properly explain what a deposit is for and why it is used in order to diffuse these situations. Let’s not overreact to rare situations while at the same time exposing our clients and brokerages to possible legal conflict.
Too often we in the industry use what appears to be a good idea. Others see it and think it’s great and since another Realtor used it, it must be legal and they can use it too, all while failing to fully consider the total ramifications. Until challenged, legally or otherwise, it works great but, if challenged, it is too late to retract. I think the use of this clause by any Realtor needs to be looked at with a much deeper interpretation of the implications it creates.
Mr. Campanale stated that he obtained a response from RECO that this clause did not violate any RECO rules as far as Joe Richer (the Registrar) could determine. What was not mentioned was that his request apparently was focused entirely on whether the clause complied with rules for permission and disbursement of deposit funds and NOT the legal or other ramifications of the clause and its use.
This goes much further when you consider what is not said in the clause. After a lot of comments from Realtors, RECO felt it necessary to state their position (alarm bell # 1).
Mr. Richer stated very clearly in his response that: 1) his approval only extends to the consent for written direction for disbursement of the funds; 2) the buyer and seller must fully understand what this clause means; 3) the client must be told to get legal advice; and 4) it is your duty to advise them of such (alarm bell #2).
Does anyone hear the alarm bells sounded by Mr. Richer? Just so everyone is clear (many Realtors don’t realize this), RECO, as a consumer protection organization, will not give a legal opinion. It is not in the mandate of RECO or the Registrar to do so. RECO can only advise whether a situation would be in violation of REBBA 2002, existing Rules and Regulations and Code of Ethics and how they apply to the conduct of its Realtor registrants. They are not a court of jurisdiction. The courts and RECO are separate entities enforcing different determinations. That’s the reason Mr. Richer only comments on one portion of the clause and why there was a subsequent qualifying statement from him and may I add, a very stern warning.
Realtors, beware. Why? Here are just a few of the reasons I see a ticking time bomb with this clause.
1) By agreeing to this, any value of the deposit for enforcement of the contract is completely eliminated.
If a buyer can obtain the deposit back simply for not removing a condition, what is the use of the deposit?
A history of deposits goes back to the mid ’80s when the courts got involved in determining who the deposit belonged to. Up to this point the deposit was believed to belong to the seller, given to secure the value of the contract and its terms. In most cases it was returned when conditions were not met, provided the buyer had been diligent in their attempts to satisfy the terms. Same as today, but no releases were signed.
The court ruled that the deposit belongs to both the buyer and seller to show good faith in support of the contract. This brought about the need for signed releases from each party. The parties had to agree to the release and the disbursement terms.
Mr. Campanale seems to suggest the deposit belongs solely to the buyer and the buyer controls or should control the return of any deposits. Wrong. Courts have made it clear that all parties must agree and sign the release.
Mr. Campanale believes that this clause is sufficient direction for the return of the deposit, which RECO agreed with, as do I, but he also says no mutual release is necessary. Wrong.
I have been aware of more situations where the buyer is in breach of a contract more so than the seller. The seller should never give up his rights to control the release of deposits if the reason is in question.
2) Because there is no accountability on the buyer to perform any term of the contract and the buyer can simply walk away if the time expires, this clause could promote fraud and unscrupulous dealing by buyers.
What is to prevent a buyer from putting offers on several properties, all at the same time, to hold them while they decide what property to take, if any, or if they can flip the contract to someone else? Then they can walk away from any deal they do not want or have determined they paid too much. All at the expense of the seller, who lost other buyers.
In hot market conditions, this is an open door policy for the buyer to play whatever game they want and the seller has little to no recourse if the clause is enforced. In fact, this is already happening even without this open-ended clause and this could only make matters worse.
3) Run this clause by any seller’s lawyer and I can say with certainty it would be removed.
However a buyers’ lawyer will love it. As a Realtor, you better be on the side of your client and be aware of the legal implications of this clause. Better yet, inform your client of the legal issues in detail. Oh, I forgot to mention, we are not lawyers and really cannot do that. So it’s best, as Mr. Richer said, to make sure they get legal advice.
4) The question of whether or not an irrevocable instruction can be withdrawn has already been in question before the courts.
In that case a lawyer, upon instruction from the seller, refused to follow an irrevocable instruction in the offer to pay commission to the listing agent. The lawyer was held responsible for not following the irrevocable instruction. This, however, was appealed and as of yet I have not seen the final result.
What if your seller demanded you (the brokerage) not release the deposit in spite of the irrevocable instruction? You are caught between making a decision to release the funds or follow what could be a legal demand of your client due to the fact the buyer had breached the contract. Now you create a situation of everyone going to court, which by the way is one thing we should try to avoid in our dealings. The brokerage – not the client – is in a catch 22 position.
5) This clause suggests there is no value to a mutual release.
Wrong. A competent Realtor doing a proper job of protecting their client will always insist on a mutual release.
A mutual release creates an agreement between the parties of how the brokerage is to disperse the funds. It should not simply say “to the buyer” but rather state who the cheque should be made out to. For example, an offer to purchase says the buyer is Silly Sam in Trust. If the mutual release says to disperse to the buyer, the cheque should read, Payable to Silly Sam in Trust. However, there is no such trust and it cannot be cashed. Who paid the deposit?
More commonly, a party other than the buyer has supplied the deposit and the deposit should actually be released to that party and not the buyer. The release must direct the deposit to the party who is entitled to receive the funds. This clause gives no direction as to who the deposit should be returned to.
A mutual release creates an agreement that the parties relieve each other from further claim and also any claim against their agent. I don’t think further explanation should be required here.
A mutual release also creates an agreement that, upon signing by the brokerage, the brokerage will release the parties and also each brokerage from each other.
Last but not least, it provides the authority for the brokerage to release the funds (required by REBBA 2002) and creates a paper trail of such authority for the brokerage to support the payment from the trust account if or when there is a government audit.
6) When you remove the rights of one party you take away rights of the other party.
This is a prime example as the clause removes all rights of the seller to question why the buyer is not fulfilling the contract and just giving the deposit back. This flies in the face of all legal judgements I have seen when a buyer did not make attempts to satisfy the terms.
For example, in a case in 2015, the buyer and seller agreed the buyer could do a home inspection “at the buyers’ sole option”. The buyer arrived before the inspector and decided he did not want the property because it had a single garage and not a double. The buyer cancelled the inspection and then signed a mutual release requesting return of the deposit. The seller said no and ended up taking it to court. The buyer lost and owes the seller a substantial amount of the large deposit.
In this case, can you imagine this clause working where the seller must return the deposit and the seller says no. Who do you think will be in the middle of any legal battle? Yes, the brokerage. It also puts the responsibility on the brokerage to decide what action they should take, when if the clause had been done properly it would not be the case. The brokerage has no authority to act and make a judgement in this situation.
7) Why use a clause that invites conflict?
Mr. Campanale, after seeing the many responses to his suggestion, explained his clause more. He stated, “The release of the deposit should not be at the seller’s option. The use of this clause and the subsequent release of the deposit does not deny the seller the right to sue if they felt the buyer did not act in good faith during the conditional process.” Did I read that right? Tell me why we would use a clause that invites conflict. Why use a clause that makes a seller have to sue after the return of the deposit rather than before the return. It is just as easy for the buyer to sue as the seller, so let parties work out an agreement, have it signed properly and release all parties. Oh, and this keeps the brokerage out of the conflict if you use the proper clauses. These circumstances usually arise when the actions of the buyer come into question more so than the seller.
8) The courts have taken exception to buyers who make no effort to satisfy the conditions in the offer.
It is not a matter of knowing why a buyer did not remove the condition but more about if they actively attempted to adhere to the terms of the contract by taking action to fulfill the terms and intent of the contract. The courts have taken exception to buyers who make no effort to satisfy the conditions in the offer. This is where the seller has a right to retain or demand the funds be held until the matter is settled. That right is removed with this clause.
9) Mr. Campanale makes the comment, rightly so, that it is up to the brokerage to decide if this clause can be used by their salespeople.
However, if a buyer gives an offer through a salesperson other than the listing office and it contains this clause, decisions are often made on the spot and often in demanding situations. I would fear a lot of salespeople would let this clause slip through without consultation with the brokerage or a lawyer. This is clearly where your troubles will begin with RECO and the law. In this day and age we see brokerages with little to no control over what the salespeople do. Some certainly don’t have viable training or even care as long as deals come in.
10) When things are going well and all parties are doing as they should, this clause works.
But then it is not needed, so why put clauses into the offer that can create a problem?
11) Mr. Campanale states, “Currently, RECO holds thousands, perhaps more, of deposit dollars in trust from deals where buyer conditions were not met and the seller refused to sign the mutual release.” This is misleading.
REBBA only has provisions that clearly state after two years if entitlement has not been determined, or one year if the entitled party cannot be located, that the brokerage must send the money to the government. If the parties get into a dispute and it goes to court, the court often orders the deposit money paid and held in the court. Such monies are not handled as suggested just from the seller not signing a release.
12) A Realtor can get into an issue with RECO quickly when the client makes a complaint that you did not explain it properly so they understood what they were signing.
It should not come as a surprise to anyone that there are clients who are not always truthful. Any party can complain to RECO, whether they are honest or not, and you will have to defend it. RECO could impose a fine on you should it determine you may not have given the proper advice simply by not telling the client to obtain a legal opinion before signing. That could include other potential violations of rules as well. RECO must act on all complaints from all sources, whether valid or not. It then has an obligation to investigate any potential violation of the rules (but not any legal law issues) and can impose penalties based on the actual conduct of only the Realtor. Then you could end up dealing with litigation after that.
In my opinion, this clause may, on its own, comply with REBBA 2002 and RECO Rules and Regulations but from a seller’s legal position I think it fails miserably and completely. Obviously the intent of this clause takes away the right of the seller to contest the release of the deposit funds unless they want to use the courts. I believe the seller should have competent legal advice (before signing), which a Realtor cannot provide. You may walk yourself into a legal dispute with the seller, with the courts and with the compliance of RECO rules if the funds are returned.
The clause flies in the face of what courts have said in the past. Courts have ruled, in many cases, that a seller is within their legal rights to retain some or all of deposit monies should a buyer breach or fail to adhere to the terms and intent of the contract. The only other remedy, outside the court, is the parties agree to resolve the issue themselves, and give direction to the deposit holder for disbursement and to sign an agreement releasing each other and the agent through a mutual release.
There is no demand put on the courts that I am aware of, that a settlement of the parties must also state the parties are to release the agents involved from further claim, although in cases I have seen the judge has ordered a mutual release is to be signed, which did include the agents involved. A properly executed mutual release will have this component included. This is something a Realtor should ensure is done during the process and in writing and why a mutual release is important.
It is not in the Realtor’s best interest to allow a client (buyer or seller) to sign a contract that may put their client or themselves into a legal dispute without first obtaining a lawyer’s legal opinion.
It is also my opinion that this clause assists in encouraging salespeople to be lazy and not do their job thoroughly and completely by obtaining the proper permissions from the buyer and seller through a mutual release. If this cannot be done, there is obviously a dispute between the parties, so fix it before releasing the funds.
Mr. Campanale said: “I know that changing the way organized real estate and the Realtors who work in the industry do their business is not an easy proposition, even when it may be better for the industry itself and the consumers who rely on us.”
My response to this is that our industry has made a lot of changes to tighten up how parties and Realtors do business by changes in rules and changes brought on by the courts. In my 33 years (as a Realtor, broker, broker owner, manager) I have never seen changes done to loosen the rules or take away any consumer rights for the benefit of “the industry”.
In my opinion, this clause does nothing to better the industry or consumer protection but in fact could lead to more litigation. Consumers rely on us to conduct ourselves in a competent manner on their behalf and RECO is there to support them. It is not our business to attempt to circumvent competent and proven business practices to accommodate the convenience of Realtors or the industry by opening the door to more controversy and legal disputes between the buyer, seller and Realtors.
Let’s not play games with dynamite and our clients’ livelihood. Let’s go out of our way to provide superior service by doing our job completely and thoroughly, not looking for short cuts. Our industry has a tough reputation. Let’s not make it worse.