Escrow Disputes: What You Should Know

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Escrow Dispute

What Can You Do to Avoid an Escrow Dispute?

An escrow dispute can be an inconvenient, expensive affair. Fortunately, most real estate buyers and sellers never need to be involved in one.

The most common type of escrow dispute involves competing claims on earnest money. This is a sum that a buyer of real estate places in trust to indicate good faith commitment to completing the transaction. An earnest money deposit is a standard feature of most real estate deals. The amount required is often set by the seller, but may also be negotiable between buyer and seller and usually tends to be about 1 or 2 percent of the purchase price.

Earnest money is commonly held by the seller’s broker or a title company. The need for a third party to hold earnest money in trust is why the majority of real estate transactions require an escrow arrangement. When the transaction is properly completed, funds and escrowed items such as the deed are distributed to the parties at closing, with earnest money commonly applied toward the buyer’s down payment and closing costs.

How Does an Escrow Dispute Arise?

In cases where one of the contracted parties is unable or refuses to close, the transaction becomes a failed real estate contract. If both parties are unwilling to sign a written authorization instructing the escrow agent as to the release and disbursement of earnest money funds being held, this constitutes an escrow dispute.

Both the buyer and the seller claim that they are entitled to the earnest money or contract binder held in escrow. Agents for each party issue contradictory instructions to the escrow agent. In order to avoid liability, the agent will freeze the escrow account until the dispute is resolved.

Realtors who find their clients in an escrow dispute must be careful not to offer legal advice. Best practice is to refer clients to the sale contract for relevant information and instructions. Stay in close contact with the escrow agent and the other party in the failed contract, and keep your client updated on the situation.

Buyers or sellers in this situation should ensure they have thorough knowledge of the contract, and rely on their realtor and possibly an attorney to guide them through the conflict.

How are Escrow Disputes Resolved?

A real estate purchase contract usually includes provisions that address the resolution of escrow disagreements. During the process of entering into the contract, buyer and seller should be made aware as to who will be managing the escrow account. Each party must read the contract carefully, noting provisions regarding escrow and related matters, and turning to their realtor or attorney with any questions.

According to the Florida Association of Realtors, the Florida Realtors/Florida Bar As-Is Residential Contract for Sale and Purchase (FR/BAR) is the most common purchase contract used in Florida. The FR/BAR, Paragraph 2, Section (a) provides space for entering details regarding escrow. The initial deposit amount and delivery instructions including payment date and the selected Escrow Agent along with pertinent name and contact information are identified and available to both parties in the contract.

The Escrow Agent is responsible for holding funds, and is most often the seller’s real estate brokerage, the title company retained for the transaction, or an attorney. There are no exclusions as to who is allowed to hold escrow, so various persons or entities may sometimes be encountered. If a dispute arises and the Escrow Agent is a title company, attorney, or anyone other than a licensed Florida broker, the dispute is initially approached as a civil matter.

If the FR/BAR is in use, Sections 13, 15, 16, and 17 provide a general outline of default and dispute resolution procedures. Section 16 specifies that “Buyer and Seller will have 10 days after the date conflicting demands for the Deposit are made to attempt to resolve such Dispute, failing which, Buyer and Seller shall submit such Dispute to mediation under Paragraph 16(b).” In cases where mediation fails, the escrow dispute becomes a legal matter and “…may be resolved by instituting action in the appropriate court having jurisdiction of the matter.”

When the escrow agent is a licensed Florida real estate broker, an escrow dispute must be resolved as per § 475.25 (1) (d), Florida Statutes. If the license holder entertains doubt as to who is entitled to the escrowed property, or if conflicting demands have been made for the escrowed property, the licensee must promptly notify the Florida Real Estate Commission of such doubts or conflicting demands and also proceed with one of the following options:

  1. Request that the commission issue an escrow disbursement order determining who is entitled to the escrowed property;
  2. With the consent of all parties, submit the matter to arbitration;
  3. By interpleader or otherwise, seek adjudication of the matter by a court; or
  4. With the written consent of all parties, submit the matter to mediation.

Key Steps for Avoiding an Escrow Dispute

Of course, the best way to handle an escrow dispute is to never get involved in one. Although some disputes arise out of causes that are beyond a buyer’s or seller’s control, many disputes are precipitated by simple carelessness or misunderstanding. Therefore, as noted above, detailed reading and clear understanding of all purchase contract provisions and details, including all information regarding earnest money, is of primary importance. Here are some further steps that will help keep you clear of escrow disputes:

  • Avoid impulsive buy decisions: Buyers must be careful to avoid being swept up in the excitement of viewing a beautiful home. If a home seems like a good fit, a good policy is to sleep on it then request a second viewing. Only make an offer when due diligence has been conducted and you are 100% sure the property is right for you. Similarly, avoid being caught up in the type of frenzied buy decision that can be provoked by very competitive markets. A cautious approach, even if it means losing the property to a competitor, beats needing to back out later.
  • Complete due diligence: This is especially relevant when a buyer makes an offer on a foreclosure or other “as is” property. Sellers of such properties typically stipulate that earnest money is nonrefundable, so it is essential for a buyer to know all the risks in detail before proceeding.
  • Understand the purpose of earnest money: Buyer and seller must clearly understand that placing or receiving an earnest money deposit indicates commitment to completing the sale transaction. Such commitment means each party will do their best to adhere to all contract provisions including meeting various deadlines and staying in close contact via their respective agents/representatives over the course of the transaction.
  • Adhere carefully to contract timelines: Buyers, sellers, and their agents should work to ensure that all deadlines are met throughout the course of the transaction. The closing date tends to get the most attention, and in some cases a seller sets a hard date for closing by writing a timeliness clause into the contract. However, there are at least 35 other possible deadlines that may appear in a real estate contract. Normally, only a few of these are used. Common deadline examples include times set for seller’s offer acceptance, owner’s title insurance commitment, buyer’s receipt of HOA documents, seller’s property disclosure, loan application completion, and buyer’s receipt of an appraisal report. Any missed deadline may offer one party or the other an opportunity to escape the contract. This can lead to a failed contract and the potential for an escrow dispute.
  • Retain contract contingencies: Buyers should be very circumspect when it comes to agreeing to the removal of contract contingencies that give them the right to cancel the purchase as needed. For example, contingencies regarding loan approval, property appraisal, insurability, title search, and inspection report allow for penalty-free contract cancellation. Buyers should retain the right to cancel until a successful closing is 100% certain.
  • Know when to let go: Sometimes a buyer, for personal reasons or otherwise, simply cannot or does not want to go through with the transaction. If there is no clear legal justification for breaking the deal, it is best to simply acknowledge the fact and walk away without attempting to recover the earnest money deposit. Likewise, a seller should never attempt to push legal boundaries in an effort to retain a buyer’s deposit.

Get Professional Advice

A real estate purchase is the largest investment most people will ever make. Real estate transactions, whether one is on the buy- or sell-side, are complex and can be confusing, but they do go smoothly in the majority of cases. Still, it never hurts to have professional help on your side. A good real estate lawyer can be of help during the initial offer and negotiation processes, then can ensure that you have full understanding of any sales/purchase contract including matters of escrow and earnest money.

Particularly in cases involving a substantial earnest money deposit, it is wise to enlist the help of an experienced attorney. This dramatically reduces the possibility of becoming entangled in an escrow dispute, and if such an unfortunate situation does arise, you will be prepared to protect your interests.

The team at Barry Miller Law has intimate familiarity with FR/BAR Contracts, escrow procedures including dispute mediation and resolution, and all other aspects of Florida real estate law. If you or someone you know needs assistance with drafting a real estate contract or reviewing a contract to ensure that legal protection is in place, call Barry Miller Law at 407-423-1700 or email us at [email protected] to schedule a consultation.

Visit our Blog for more helpful information on real estate transactions.

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