| Earnest Money Woes |
|
|
|
| Wednesday, 04 October 2006 | |
|
EARNEST MONEY WOES A case decided in June of 2003 highlights the responsibilities and duties of real estate brokers in dealing with “earnest money”. In Re/Max Realty 100 v. Basso and Basso Builders, Inc., 23 WI App. 146 (June 18, 2003), the facts are as follows: Re/Max, as the listing broker, entered into a listing agreement on May 3, 2000 with Basso (the “Seller”) which ended on June 16, 2000. The home was listed for $199,900 and the commission was established at 6%, and 5% if Martin of Re/Max was the selling agent. The listing contract stated in relevant part as follows: “If Broker holds trust funds in connection with the transaction, they shall be retained by Broker in Broker’s trust account. Broker may refuse to hold earnest money or other trust funds. Should Broker hold the earnest money, Seller authorizes Broker to disburse the earnest money pursuant to the terms of the offer to purchase, option or exchange agreement used in the transaction. If the transaction fails to close and the earnest money is disbursed to Seller, then upon disbursement to Seller the earnest money shall be paid first to reimburse Broker for cash advances made by Broker on behalf of Seller and one half of the balance, but not in excess of the agreed commission, shall be paid to Broker as Broker’s full commission in connection with said purchase transaction and the balance shall belong to the Seller. This payment to Broker shall not terminate this Listing.” In May 2000, another Re/Max agent, Surges showed the property to Smolik and they wrote an offer to purchase which stated as follows: “Unless otherwise agreed, earnest money shall be paid to and held in the trust account of the listing broker (buyer’s agent if Property is not listed or Seller’s account if no broker is involved), until applied to purchase price or otherwise disbursed as provided in the Offer.” The offer was countered after the Smoliks signed a second counteroffer on May 20, 2000, which was accepted. The Smoliks signed a personal check in the amount of $25,000 as earnest money. The closing was scheduled for May 26, 2000. After a home inspection on May 23, 2000, Re/Max realized that the Smoliks’ out-of-state check would not clear in time for the closing and Surges arranged for the Smoliks to provide him with a certified check. The personal check was returned, but the Smoliks never produced a certified check. The Seller was never advised that the personal check was returned and the Smoliks failed to appear at the closing. When the Seller found out that there was no earnest money, the Seller pursued the Smoliks and received the $25,000. Re/Max sued the Seller claiming that it was due a commission under the listing contract and the Seller counterclaimed alleging breach of contract and breach of fiduciary duty. The jury found for the Seller and the case was dismissed. Re/Max appealed. The Court of Appeals stated that Re/Max sought its commission under the provision of the listing contract that provides that it is entitled to the earnest money even if the buyer fails to complete the transaction. However, the Court of Appeals held that, under the explicit and unambiguous terms of the listing contract upon which Re/Max relies, Re/Max is entitled to its commission only if the Buyer fails to complete the transaction and the earnest money is distributed to the Sellers. Thus, under the plain terms of the contract, because the earnest money was never distributed to the Seller, Basso, Re/Max is not entitled to its commission. In addition, the court found that Re/Max never complied with the terms of the Smoliks’ offer to purchase, which indicates that earnest money must be paid to and held in the trust account of the listing broker until applied to the purchase price or otherwise disbursed. Here the earnest money was never deposited in Re/Max’s trust account. In fact, Martin acknowledged that by returning the check to the Smoliks, Re/Max was, in essence, refusing to hold the earnest money, despite the offer to purchase’s requirement that it do so. The court agreed with the trial court that in returning the earnest money check to the Smoliks, Re/Max breached its contract with the Seller. Re/Max returned the earnest money to the Smoliks without the Seller’s knowledge or consent. The listing contract did not permit it to do so. At trial, Martin acknowledged that any basis for a commission had to come from the listing contract and that nothing in the listing contract required earnest money in the form of a certified check. Martin also acknowledged that no one ever told Seller that the personal check had been returned to the Smoliks. Martin conceded that the offer to purchase required Re/Max to hold the earnest money but Re/Max had refused to do so and he could not explain or reconcile this problem. In addition, Surges acknowledged it was a mistake to return the personal check to the Smoliks. This was a serious breach of duty that a broker owes a client. This breach jeopardized Basso’s right to the $25,000 earnest money, a substantial amount of money, and forced him to pursue other remedies on his own. The court also agreed with the Seller that Re/Max arguably violated its duties under Wis. Stat. § 452.133. Section 452.133 addresses the duties of brokers and states, in relevant part: “(2) Duties to a client. In addition to his or her duties under sub. (1), a broker providing brokerage services to his or her client shall do all of the following: (a) Loyally represent the client’s interests by placing the client’s interests ahead of the interests of any other party, unless loyalty to a client violates the broker’s duties under sub. (1) or s. 452.137(2). (b) Disclose to the client all information known by the broker that is material to the transaction and that is not known by the client or discoverable by the client through reasonably vigilant observation, except for confidential information under sub. (1)(d) and other information the disclosure of which is prohibited by law. (c) Fulfill any obligation required by the agency agreement, and any order of the client that is within the scope of the agency agreement, that are not inconsistent with another duty that the broker has under this chapter or any other law.” By returning the check to the Smoliks in the manner that it did, Re/Max arguably placed the needs and interests of its business ahead of the Seller’s needs, in violation of § 452.133(2)(a); failed to disclose to Basso the return of the check, information material to the transaction, in violation of § 452.133(2)(b); and failed to fulfill the terms of the offer to purchase, in violation of § 452.133(2)(c). The Court held that Re/Max is not entitled to a commission under the terms of the listing contract as the earnest money was never disbursed to Basso. The Court construed the listing contract literally and saw no reason to deviate from the contract. Because the Court found a breach of contract, it did not have to decide the breach of fiduciary allegation. The case demonstrates two very important points: (1) comply with the explicit terms and conditions of your “earnest money” agreement with the seller as well as offer to purchase and counteroffer language, and (2) keep your seller advised of all material matters affecting the relationship and preferably confirm material discussions in writing. In our view, this case would have been avoided and with a different result if Re/Max had advised the Seller and had received the permission of Seller to return the personal check. As a minimum, the broker should not have returned the personal check until it received the certified check. The receipt and disposition of earnest money is not a problem in most cases. However, there are enough cases where “earnest money” is a point of contention and therefore brokers should as a matter of policy follow the strict language of the listing agreement as supplemented by the accepted offer to purchase. |