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Legislation Proposed – Earnest Money

On April 25th, Representative Ryan Smith introduced legislation that proposes changes to Ohio’s real estate license law The proposals are numerous and will be dissected in a series of articles. One such proposal and the subject of this article relates to the broker’s release of earnest money from the brokerage trust account. Specifically, the law is to be amended to provide that a broker can release moneys maintained in trust if the parties provide the broker with separate written instructions signed by both the buyer and seller.

Most agents might think… wait a minute, we already have clients sign a mutual release. Those agents are correct; however, the legislation seeks to address an argument that existing law does not require a mutual release because the purchase agreement itself instructs the brokerage how to disburse the earnest money. Let’s take a look.

A broker’s disbursal of earnest money is governed both by R.C. 4735.24 and the provisions of the Purchase Contract. The language in the standard CBR/CBA Purchase Contract, Paragraph 10.4 is identical to that of R.C. 4735.24(A). To meet the requirement of obtaining “written instructions that both parties have signed” specifying the disbursal of earnest money, it is customary business practice for Brokers to require separate written instructions from the Buyer and Seller. However, it has been argued recently in legal circles that such is over and above what is technically required for disbursal.

This legal interpretation is as follows: If there are provisions in the Purchase Contract that specify to whom the earnest money is to be disbursed, such provisions meet the “written instruction” component of R.C. 4735.24(A)(2). For example, if the Purchase Contract designates that the deposit is to be returned to the Buyer, and the Purchase Contract is signed by both the Buyer and Seller, such instruction is sufficient for the Broker to release the earnest money to the Buyer.  Hence, under this interpretation a separate written instruction, i.e. a mutual release, is unnecessary and duplicative.

The proposed legislations seek to clarify the law by providing that the purchase contract itself cannot constitute instruction to the broker on how the earnest money is to be released. Rather when a contract fails, the broker must have a separate mutual release signed by both the buyer and seller before releasing the earnest money.

Begs the question: Why have language in the purchase contract specifying that upon the failure of a contingency the earnest money goes to the buyer, if upon the exercise of the contingency, the buyer has to have a separate written instruction signed by the seller in order to release earnest money?  Inserting a requirement for a separate written instruction allows disgruntled sellers to hijack a buyer’s earnest money with no consequence or repercussion.  Such is precisely why more and more buyers are electing to place earnest money with a title company or law firm instead of their brokers.

In a time where brokers are working to stay relevant to earn their compensation, this proposed change unfortunately gives consumers a reason to avoid brokerage services as it relates to earnest money.

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