by Lorie Garland
Assistant Vice President
OAR Legal Services
In April 2009, a law became effective which allows brokers to include a provision in their purchase contract that permits disputed earnest money to be returned to the buyer after two years. Many brokers amended their contracts to include this provision, however, doing so is optional. If this provision is included in a contract, brokers must ensure that the earnest money is timely returned to the buyer after the two year period. While brokers should make this disbursement as soon as the two year period has run, the law requires that the earnest money be returned by September 1 of that calendar year. As the law has been in effect for over two years, brokers may be holding disputed earnest money that must be disbursed prior to September 1. It is time to review your trust account records. Brokers who fail to disburse the money by September 1 could be disciplined by the Ohio Division of Real Estate and Professional Licensing.
This law, ORC § 4735.24, resulted from the problems created when a transaction fails to close and the parties cannot agree on which of them is entitled to the earnest money. One goal of the law was to provide clear statutory authority for the handling of disputed earnest money. ORC § 4735.24(A) meets this goal by providing that if a transaction fails to close, the broker must maintain the earnest money in the broker’s trust account until the parties sign a written agreement on how the broker is to disburse the money, the court issues an order specifying how the money is to be disbursed, or the money becomes unclaimed under Ohio law and is remitted to the Ohio Division of Unclaimed Funds.
A second goal of the law was to establish a process that would create a time limit on how long a broker must continue to hold disputed earnest money. It accomplishes this goal by allowing a broker to include a provision in the purchase contract that creates a sort of “statute of limitations” on the obligation to hold the funds. Such a provision is optional.
ORC § 4735.24(B) contains the requirements for the optional contract provision. It provides that the parties will have two years from the date the earnest money was deposited in the broker’s trust account to resolve the dispute or initiate legal action. If they fail to notify the broker that they have done either one of these two things, then under the terms of the contract, the broker will return the earnest money to the purchaser without any further notice to the seller. By including such a provision, brokers are able to disburse these disputed earnest money deposits after two years from the date of deposit.
ORC § 4735.24(C) provides that brokers who are obligated to return earnest money to a buyer under such a provision in the purchase contract will have no later than September 1 of that calendar year to disburse the money to the buyer. While brokers will want to make this disbursement as soon as the two year time period has run, this September 1 date is in the law to provide a clear deadline. As September 1 is fast approaching, brokers with this provision in their purchase contract should review their trust account records for disputed earnest money. If it has been held for over two years and there has been no agreement or notice that a court action to resolve the dispute has been filed, the broker should disburse the funds to the buyer. The law also provides that in the event the broker is unable to locate the buyer, the broker should follow the unclaimed funds laws and remit the money to the Ohio Division of Unclaimed Funds.
FAQs on Handling Disputed Earnest Money
Q: What is the sample language that has been approved by the Ohio Division of Real Estate and Professional Licensing that meets the requirements of ORC § 4735.24(B)?
A: In the event of a dispute between the seller and purchaser regarding the disbursement of the earnest money, the broker is required by Ohio law to maintain such funds in his trust account until the broker receives (a) written instructions signed by the parties specifying how the earnest money is to be disbursed or (b) a final court order that specifies to whom the earnest money is to be awarded. If within two years from the date the earnest money was deposited in the broker’s trust account, the parties have not provided the broker with such signed instructions or written notice that such legal action to resolve the dispute has been filed, the broker shall return the earnest money to the purchaser with no further notice to the seller.
Q: Does the license law require that all purchase contracts contain the above noted earnest money provision?
A: No. The law merely allows brokers to include such language at their option.
Q: Is this provision only available for residential purchase contracts or can it be used for commercial and industrial transactions as well?
A: It can be used for any purchase agreement for the purchase/sale of real estate.
Q: I am holding disputed earnest money pursuant to a purchase contract that did not contain the earnest money provision. Can I return the earnest money to the buyer after two years?
A: No. The ability to return the earnest money to the buyer after two years will only apply to purchase agreements that contain the provision that sets forth that process. Because that language wasn’t in the purchase contract on which you are currently holding earnest money in your trust account, that process cannot be used.
Q: If I include the earnest money provision in my purchase contract and I haven’t received either a release signed by the parties or a court order within two years, do I have to notify the seller that I am returning the earnest money to the buyer?
A: No. Under the language permitted by ORC § 4735.24(B), you do not need to notify the seller that the earnest money is being remitted to the buyer. This should be clearly stated in the earnest money language included in your purchase contract.
Q: How do I calculate the two year period?
A: ORC § 4735.24(B) specifies the two-year period runs from the date the money was deposited in the broker’s trust account.
Q: What if I miss the two year anniversary of when the money was deposited? For example, the two years is up on May 1, 2011, but I don’t send it back until July 1, 2011. Will I be disciplined by the Division of Real Estate and Professional Licensing?
A: Under ORC § 4735.24(C), brokers who are obligated to return earnest money to a buyer under such a provision in the purchase agreement will have no later than Sept. 1 of that calendar year to disburse the money to the buyer. While brokers should make this disbursement as soon as the two year time period has run, this Sept. 1 date is included in the law to provide a clear, definable deadline. If you would return the earnest money after September 1, you could be disciplined by the Division of Real Estate.
Q: What if I mail the earnest money to the buyer, but it is returned undeliverable?
A: Certainly you want to make a good faith effort to find a good address for the buyer. In the event the broker is unable to locate the buyer, the broker should follow the Unclaimed Funds Laws and disburse the money to the Ohio Division of Unclaimed Funds.