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TO: SMAR
Members
FROM: Alvin C. Monshower, Jr., Legal Counsel
RE: RETURN OF EARNEST MONEY DEPOSIT -
NEW ADVISORY BY
THE MARYLAND
REAL ESTATE
COMMISSION
DATE: August
31, 2010
URGENT: IMMEDIATE ATTENTION REQUIRED
The Maryland Real
Estate Commission has announced a new advisory regarding the return
of earnest money deposits by real estate brokers in residential
real estate transactions where the property is located in a
Homeowners Association or is a condominium.
Specifically, the
Commission has advised that a real estate broker may return the
earnest money deposit to the buyer without a
written release of deposit agreement signed by the
seller and the buyer in those instances where a buyer timely
rescinds the Contract of Sale, in writing,
based upon the receipt of the required disclosures from the seller
and/or the condominium or Homeowners Association (“HOA”).
Under current law, the
buyer, at the election of the buyer, has the right to rescind a
contract of sale based upon the receipt of the required HOA or
condominium documents. The buyer’s right of rescission is for no
stated reason and without any liability on the part of the buyer.
In the event a buyer rescinds a contract of sale based upon the
receipt of the HOA and/or condominium disclosure documents, the
buyer is entitled to the return of any earnest money deposits made
by the buyer on behalf of the contract of sale with one exception. The
single exception is that unless the buyer returns the Homeowners
Association documents to the seller, then the seller is entitled,
under current law, to retain the cost of reproducing the HOA
documents or the amount of $100, whichever is less.
The advisory by the
Maryland Real Estate Commission is appropriate, given the fact that
current Maryland law clearly provides that a buyer who timely
rescinds a contract of sale based upon their receipt of the
required HOA and/or condominium disclosure documents, is entitled,
for no stated reason, to rescind the Contract of Sale, provided
such rescission is in writing, and to the return of any earnest
money deposits made by the buyer with respect to the contract of
sale - subject to the right of the seller to retain from any such
deposit the cost of reproducing the HOA documents or the amount of
$100, whichever is less, as stated above.
Obviously, from time
to time, real estate brokers experience instances where the buyer
clearly had the right to rescind the contract of sale and provided
timely notice of such rescission, in writing, to the seller.
However, the seller then refused to sign a release of deposit
agreement and the broker, therefore, is unable to return the
deposit money to the buyer. More often than not, the deposit money
paid by the buyer is necessary for the buyer to pursue other
purchase options of residential real property.
The recent advisory by
the Maryland Real Estate Commission is a welcomed interpretation
which will benefit both buyers and brokers in those circumstances
where the buyer timely, and in writing, rescinds the contract of
sale based upon the buyer’s receipt of the required HOA and/or
condominium disclosure documents.
WARNING!!
However, current paragraph 19 of the Maryland Association of
REALTORS® Residential Contract of Sale (dated 10/09) provides that
“... In the event this Contract shall be terminated or settlement
does not occur, Buyer and Seller agree that the Deposit shall be
disbursed by Broker only in accordance with a Release of Deposit
agreement executed by Buyer and Seller.”
The
above-quoted language as currently contained in paragraph 19 of the
MAR Residential Contract of Sale controls over the advisory as
issued by the Maryland Real Estate Commission. Under the current
paragraph 19, since both the seller and buyer have agreed that the
deposit shall not be returned unless the buyer and seller each
execute a written Release of Deposit Agreement, such contractual
agreement by and between the buyer and seller controls and prevails
over the recent advisory of the Maryland Real Estate Commission.
The Maryland
Association of REALTORS®, in light of the recent advisory by the
Maryland Real Estate Commission, has revised paragraph 19 of the
MAR Residential Contract of Sale form to conform with the
Commission’s advisory and contains the authority for a broker, in
the good faith opinion of the broker, to distribute earnest money
deposits without a written Release of Deposit Agreement in those
cases and circumstances where a buyer timely rescinds the contract,
in writing, based upon the buyer’s receipt of the required HOA
and/or condominium disclosure documents.
The revised MAR
Residential Contract of Sale is scheduled for release in
mid-September and will bear the revision date of 10/10.
In light of
the issues as raised above, it is important that real estate
brokers and agents understand and adhere to the following
recommendations:
∙
DO NOT return deposit monies to a
buyer under any existing MAR Residential Contract of Sale dated
10/09 or earlier. As stated above, the current language of
paragraph 19 of the MAR Residential Contract of Sale supersedes the
advisory of the Maryland Real Estate Commission and, pursuant to
the express language of paragraph 19, provides that a real estate
broker may not disburse earnest money deposits in transactions
which are terminated or settlement does not occur, except upon a
Release of Deposit Agreement signed by both buyer and seller.
∙
In the event the buyer rescinds a Contract of Sale
based upon the buyer’s receipt of the HOA and/or the required
condominium disclosure documents and which contract of sale is
dated 10/09 or earlier, then the real estate broker may not
disburse such funds, notwithstanding the advisory by the Maryland
Real Estate Commission and would be subject to potential liability
for doing so.
∙
Once the revised MAR Residential Contract of Sale is disseminated
and which will authorize a real estate broker to disburse the funds
to a buyer who timely rescinds a contract of sale, in writing, upon
receipt of the required HOA and/or condominium disclosures, then
the real estate broker would be authorized to disburse the funds
pursuant to the recent advisory by the Maryland Real Estate
Commission.
∙
Once the revised MAR Residential Contract of Sale is received, take
all steps necessary to remove all prior MAR Residential Contract of
Sale forms from your office files which predate the publication date
of 10/10 and impress upon real estate licensees the need to remove
from their personal files all prior versions of the MAR Residential
Contract of Sale.
∙
If the transaction involves a rescission by the buyer based upon
the disclosures as required under the Maryland Homeowners
Association Act, then the real estate broker, prior to disbursing
any earnest money deposits to the buyer, must first ascertain from
the seller the actual reproduction cost incurred by the seller in
providing the HOA documents to the buyer. Under no circumstances
may a broker deduct more than $100 from the earnest money deposit
prior to disbursement to the buyer, assuming the actual
reproduction costs of the seller exceeds $100.
∙
Any amounts deducted by the real estate broker with respect to the
cost of reproducing the HOA documents, or the amount of $100,
whichever is less, must then be deducted from the earnest money
deposit prior to disbursement to the buyer and paid directly to the
seller in the transaction.
∙
In the event a real estate broker returns the entire deposit to the
buyer in the case of a Homeowners Association, then the real estate
broker would be liable, in my opinion, to the seller of the actual
cost of reproducing the HOA documents, or the sum of $100,
whichever is less.
∙
The advisory of the Commission does not mandate that a broker must
return the deposit if, in the good faith opinion of the broker, there
is a bona fide dispute between the buyer and the seller as to the
timeliness of the written rescission by the buyer.
∙
For the full text of the advisory as issued by the Maryland Real
Estate Commission, you may visit the home page of the Maryland Real
Estate Commission [search word: Maryland Real Estate Commission] or
the home page of the Maryland Association of REALTORS® [search
word: Maryland Association of Realtors].
Yours very truly,
Alvin C. Monshower, Jr.
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