Trust account: refund of sums received as deposits or earnest money

In the context of a real estate transaction, it frequently happens that a buyer makes a deposit on the sale price. The broker who receives this sum must then, if he is acting for an agency, gives it immediately to the agency to be put in its trust account or in the account of the agency to which your agency delegated its obligations. If the broker is acting on his own account, he must put it in his trust account. The sum received from the buyer must remain in the trust account until it is required by the notary for signing of the deed of sale.

However, the procedure the agency or broker - trustee should follow is much less clear when the seller no longer wants to sell or the buyer no longer wants to buy. Too often in such situations, the agency or broker does not know to whom he should refund the deposit held or at which party's request he should act. Can the agency or broker keep this deposit to pay his compensation? What happens to the money if the seller refuses to allow it to be refunded to the buyer who requests it?

Unfortunately, the existing regulations do not contain any provisions for what should be done with the deposit when one of the parties wishes to desist from his obligations, before the signing of a deed of sale. To compensate for this deficiency, which has serious consequences for protection of the public, the OACIQ has established a detailed procedure to be followed when circumstances are not as simple as foreseen in the existing Act and By-laws.

What do the existing Act and By-laws say

The essential provisions of the Real Estate Brokerage Act can be found in section 10:

Sect. 10 All money received by a broker’s licence holder in the course of his or her functions that does not belong to him or her must be deposited in a trust account as specified in the Organization’s regulations.

The interest earned on money held in trust that is not claimed by the person who is entitled to the interest must be paid to the Organization, as specified in the Organization’s regulations.

Concerning the regulations, this issue is covered by sections 24 and following Regulation respecting records, books and registers, trust accounting and inspection of brokers and agencies, of which section 25 reads as follows:

Section 25 - The sums that must be paid into a trust account are paid immediately, under the terms of the trust provided for in the transaction proposal or under the terms of any other agreement, into a general trust account opened under the name of the licence holder.

Where a person who entrusted a sum to the licence holder expressly requests that the interest on that sum be remitted to him or her, the licence holder must immediately transfer the sum from the general trust account to a special trust account. The broker or the agency must ensure that the name of the client for whom the account is opened is indicated.

The agreement designating the agency or broker-trustee is usually established by clause 4.3 of the mandatory Promise to purchase form (PP).

Pursuant to clause 4.3, the sum so received shall:

• serve as a deposit upon the signing of the deed of sale if a sale occurs, which is the very object of the deposit; or
• be refunded to the buyer if the promise becomes null and void.

However, nothing in this clause tells us what should happen to the deposit if it becomes obvious that no transaction will be concluded, without the Promise to purchase having become "null and void" within the legal meaning of that expression.

However, if the mandatory Promise to purchase form is not used, it will be necessary to examine the clause or the arrangement relating to the keeping of sums in trust.

Deposit or earnest money

The contract, which in most cases is a Promise to purchase, constitutes the law governing the parties. The agency or broker must therefore refer to this document to first check whether it is a deposit or earnest money, i.e. a sum of money given guarantee an agreement, and second determine who will receive the sums he holds in trust.

In the case of earnest money

A sum remitted as earnest money is not presumed. There must be an express stipulation on this subject in the Promise to purchase, failing which, this sum will be considered a simple deposit to be applied upon the signing of the deed of sale.

When a buyer's Promise to purchase is accompanied by a sum representing earnest money and this buyer desists from his promise, the agency or broker-trustee of that sum must consider this sum as automatically belonging to the seller. Conversely, when a buyer's Promise to purchase is accompanied by a sum representing earnest money and the seller desists from his promise, the agency or broker-trustee must consider this sum as automatically belonging to the buyer. Moreover, the buyer will then be entitled to claim from the seller a sum equal to his deposit, given the seller's desistment from his obligations under the Promise to purchase. In all cases, neither the seller nor the buyer may claim any other amount from the other party to the transaction, the earnest money agreement representing the liquidated damages.

In the case of a deposit

In the absence of an earnest money stipulation in the Promise to Purchase, the sum paid by the buyer upon the signing of the Promise to purchase must be considered as a deposit.

Unless otherwise stipulated, the aforementioned clause 4.3 contains the conditions for payment of a sum as a deposit. According to this clause, the agency or broker-trustee may only dispose of this sum in accordance with the clause's stipulations. Bear in mind that a deposit delivered with a Promise to purchase can only be applied on the sale price to be paid and only if a property title is transferred. The deposit held by the agency or broker-trustee therefore belongs to the buyer until a deed of sale is signed or a judgment is rendered executing the deed. Apart from these situations, the seller has no right to the deposit in trust.

Therefore, an agency or broker-trustee may not pay all or part of a deposit to the seller unless a deed of sale is signed, a judgment to this effect is rendered or the buyer has authorized it.

Moreover, if a situation arises where the deposit should be refunded without this being specified in the Promise to purchase, the following statements should be examined.

Different situations: procedure to follow

If the parties, by mutual agreement, terminate the Promise to purchase, the buyer is entitled to have his deposit refunded by the agency or broker-trustee upon presentation of a document establishing this arrangement and a written request for a refund. Obviously, this arrangement must be signed by the parties. It is not necessary for the arrangement to stipulate expressly what will become of the deposit. However, if this arrangement specifies that the deposit must be refunded in full to the seller, the agency or broker to whom the deposit was entrusted must obviously comply with these instructions. Note that in all cases, a written agreement is still the agency or broker-trustee's best protection against eventual lawsuits by the parties to a transaction. Since such a document is not always available, it might be useful to apply these few recommendations:

1. If a court orders the resolution or cancellation of the Promise to Purchase, the buyer is entitled to have his deposit refunded by the agency or broker-trustee upon presentation of the judgment and a written request to this effect. It is not necessary for the judgment to be specific regarding the refunding of the deposit.
2. If the deadline for executing the deed of sale has expired and it seems that this deed will never be signed, the agency or broker-trustee, at the written request of the buyer, should refund his deposit to him, unless the seller has served this buyer with an action in execution of the deed. For his own protection, however, the agency or broker-trustee who does not know the state of the proceedings between the seller and the buyer should send a letter to the seller when he receives a written request from the buyer, enjoining him to file an action in execution of the deed within a specified time limit (10 days, for example), failing which he will refund the deposit to the buyer without further notice or delay.
   
   The action in execution of the deed is the only proceeding which may allow the agency or broker-trustee to keep a deposit given by a buyer, since a transfer of title is then possible. In this case, the sum held in trust must be paid as a deposit on the sale price only.
3. An agency or broker-trustee should refund the deposit to the buyer if an action for damages is filed by the seller since in this case the seller has waived his recourse in execution of the deed and thus the possibility of transferring title to the property. However, the action for damages does not prevent the seller's lawyers from executing an attachment, which could be served on the agency or broker-trustee. The agency or broker-trustee would then have no other choice but to comply with the court's orders.
4. If the deadline for executing the deed of sale has not expired, the agency or the broker-trustee should wait for this deadline to expire and then comply with the requirements of point 2.
5. The agency or the broker-trustee must refund the deposit to the buyer when the seller sells his property to a third party, thereby making it impossible to execute a deed of sale.

Form letters for responding to a request for payment or refund of sums held in a trust account: