What happens to the money when the real estate deal falls apart?

This article is adapted from a speech given at a recent seminar at the Broward County Bar Association.

Sooner or later every real estate practitioner’s nightmare scenario comes true: The deal falls apart, but both the buyer and seller believe that the other side is in breach of contract. Each feels entitled to the deposit money being held by the escrow agent.

As recently as a decade ago, it was typically the real estate broker holding the deposit. If the purchase and sale contract allowed for it, he or she would file paperwork with the Florida Real Estate Commission (FREC) for what’s called an “escrow disbursement order.” Eventually, FREC would issue their decision. Over the years, though, brokers have increasingly preferred not to hold the escrow monies; today, most money is held by the closing attorney or Title Company; the result is that the mechanism for resolving this problem has become more complex.

Due to the fees and time involved, attorneys or title companies facing these failed deals first urge the parties to try to resolve the problem themselves. For example, perhaps the Realtor or closing agent can help one party realize that he is not entitled to the money under the terms of the contract (e.g., maybe the buyer filed for financing or condo approval after the allowed contract date, or the seller did not disclose material defects about the property).

If they cannot come to terms, another good option is mediation, where a trained mediator (who is a neutral 3rd party) works with each side to reach a voluntary agreement. (Some contracts actually require mediation as a first step towards resolving the dispute.)

If these steps are unsuccessful, the escrow agent then files an action with the state court (or an arbitrator, if the contract allows it). This filing is known as an “interpleader,” a term that stems from Rule 1.240 of the Florida Rules of Civil Procedure.

In an interpleader, the escrow agent in effect sues both the buyer and the seller. After the attorney files the complaint with the court, the buyer and seller have the opportunity to respond to the complaint, and to file “cross claims” against each other for breach of contract (often hiring their own attorneys to represent them). During the process, the attorney/escrow agent seeks the court’s permission to deposit the money with the court. At some point (typically months or years later; sometimes following an actual trial), the judge decides who gets the remaining money and allows it to be disbursed from the court escrow.

Keep in mind that the attorney filing the interpleader will charge fees for their out of pocket filing costs, as well as for their time. Some contracts allow the filing attorney to deduct his/her court costs before depositing the money, so the amount put into the court by the escrow agent may be less than the buyer’s original deposit.

The three contacts typically used in South Florida have slightly different provisions regarding escrow disputes, which are worth noting:

The Ft. Lauderdale Board of Realtors contract states that “any controversy may be submitted to mediation prior to arbitration or litigation,” with the mediator/arbitrator’s fee paid equally by the parties. The difference between mediation and arbitration is that in the former the agreement is voluntarily reached by the parties, whereas in arbitration, the parties give a chosen arbitrator the power to make a binding decision.

The Far/Bar contract does not offer the option of arbitration, but requires an attempt at mediation if the parties can’t agree among themselves after 10 days. The expense of the mediator is split between the parties.

The Florida Association of Realtors (FAR) contract gives the parties 30 days to mediate, after which they can go to arbitration or court.

Regardless of the specifics of the contract, it’s always best to avoid court if at all possible. Sometimes, just educating the parties about the hassle, time and expenses that will be involved is enough to get them to accept a reasonable agreement. After all, everyone benefits if the parties can quickly put the failed deal behind them and move on to one that is ultimately successful.