by Carl Horst
The Ohio Association of REALTORS was able to achieve a major legislative victory in the waning days of the 127th General Assembly with passage of industry-backed recommendations that will provide brokers with a viable option for disbursing “stranded” earnest money from trust accounts after a reasonable period of time.
The recommendations, which were set forth in the OAR Earnest Money Release Task Force Report that was approved by the Board of Directors at the Annual Convention, were included in legislation that was approved by legislators during its “lame duck” session in mid-December.
“Having these much-needed, common-sense improvements adopted prior to the conclusion of this legislative session is a major victory for the industry,” said Bob Fletcher, OAR’s senior vice president and chief lobbyist. “We’re extremely gratified that lawmakers agreed with the approach we offered to remedy the problems brokers can face in releasing earnest money.”
The OAR-initiated recommendations came from a Task Force appointed by Immediate Past President Brad Knapp in 2008. The group examined the conclusions and recommendations of a 2007 report by the University of Toledo on the topic. The Task Force identified a number of key elements to deal with the problem of earnest money deposits held in real estate brokers’ trust accounts that could not be released because of disputes or other factors preventing brokers from securing necessary authorization to disburse such funds. Among its objectives to include in legislation:
• A clear, statutory process that does not require a subjective determination by the broker;
• Resolution within a reasonable, specific time frame;
• A process that can be implemented at little or no cost to the broker or parties;
• Clear contract language regarding how earnest money disputes will be resolved by the broker; and
• A process that can be implemented without further notice to the parties by the broker to eliminate current issues when parties cannot be located.
Prior to the adoption of the new standards, brokers would often be required to hold earnest money in trust accounts for extended periods due to unresolved disputes between parties or other reasons, said Peg Ritenour, OAR’s vice president of legal services.
“The Task Force, under the leadership of Chairman Terry Hankner, did a remarkable job of looking at the current situation, consider findings of the University of Toledo report and canvass other states to determine the best approach to modify Ohio law,” Ritenour said.
“The fact that the recommendations were accepted by lawmakers so quickly is a testament to the fact that the OAR report was not only well considered, but that the current real estate marketplace necessitated these changes to state law.”
The new rules, accomplish the following objectives:
A. Codify in Chapter 4735 of the Ohio Revised Code the Division’s position that when a contract fails, a broker cannot disburse earnest money held in the broker’s trust account without the written consent of the parties or a court order that specifies to whom the broker shall pay the funds.
OAR believes that it is important to give parties to a failed contract sufficient time to resolve their dispute voluntarily or through litigation. Thus, it supports the Division’s current position that such money remain in the broker’s trust account for a reasonable period while this process takes place. However, it believes it is important for this to be set forth in Chapter 4735 so there is a statutory provision to which the parties and their counsel can be directed as authority for the broker’s refusal to disburse funds.
B. Permit brokers to include language in their purchase contract that provides that if, within two years from the date the earnest money was deposited in the broker’s trust account, the broker has not been notified that (a) the parties have reached a mutual agreement or (b) legal action to resolve the dispute has been filed, the broker will disburse the earnest money to the buyer with no further notice to the parties.
OAR contends that a time limit for holding such disputed funds is necessary. The Task Force Report concluded that two years from the date the funds were deposited in the trust account is sufficient time for the parties to resolve the matter or to pursue their legal remedies through the court of appropriate jurisdiction. After two years, if the parties have not reached an agreement or initiated legal action, the Task Force believes that the earnest money should be returned to the buyer who initially deposited it. The Task Force determined that this process will meet the objectives it outlined above, namely allowing for a clear, cost free mechanism that can be set forth in the purchase contract and followed by the broker with no further notice to the parties or subjective determination by the broker.
C. Brokers who include such language in the purchase agreement will have until September 1st of that calendar year to disburse the earnest money to the buyer.
If brokers choose to include such a provision on a purchase contract, OAR believes that it is necessary to establish an annual deadline by which they must “sweep” their trust account of any funds that must be returned to the buyer. This will establish a clear, definable deadline and avoid potential claims that the broker did not disburse the earnest money to the buyer in a timely manner.
D. Such a contract provision should be optional rather than mandatory.
While most parties utilize a purchase contract provided by their broker, there are some situations where the broker’s contract is not utilized. Examples of this would include commercial transactions and sales involving bank owned properties. While it is believed most brokers and local boards of REALTORS will include such a provision, OAR did not want to place members in jeopardy of a license law violation if the parties used their own contract or refused to include such a provision.