Blog by Andrew Peck

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"When do brokerages hold money as stakeholders?"

"When do brokerages hold money as stakeholders?"

"We represent the seller; the buyer has a “no agency” relationship. The contract was accepted with subjects to be removed by July 31. The buyer informed us that they can not remove their subjects, so we prepared the mutual trust released form and forwarded it to the seller to be signed. The seller did sign the form and returned it to us by fax and we then sent it to the buyer for their signature and they signed it and faxed it back to us. Now, we received a call from the seller who now says they do not agree to release the deposit to buyer.  What should we do?"

Great question. As I have said many times before we proceed any further we first start by asking the question, “Who is my client and what are his lawful instructions?” In this case, the client is the seller and not the buyer. However in the case of holding trust money we are specifically governed by the Real Estate Services Act which says that we hold funds as a stakeholder and not on behalf of any particular client:

Circumstances in which brokerage holds money as stakeholder:

28 (2)  If the brokerage holds the money in a brokerage trust account, then, despite any rule of law to the contrary, the brokerage holds that money as a stakeholder and not as agent for one of the parties to the trade in real estate,
(a) unless or until the parties agree otherwise in writing, or
(b) unless or until circumstances established by the regulations apply.

This means we are not able to act for only the seller in our capacity in which we hold the money. However, the seller has given us instructions that they believe they have an adverse claim against the deposit money so to release that money would be contrary to their rights under the stakeholder provisions. This may not be considered a lawful instruction from the seller but if the seller has sought legal advice and believes they have a legitimate claim against the deposit money, then the prudent action is for the brokerage to continue to hold the money as a stakeholder until the parties have indicated to the brokerage to release their stakeholding requirement. While the buyer may indeed have a right to reclaim the deposit and a court may find that to be the case, at this point we must follow the instructions of the client. 

As a precaution to keep our papertrail in order, I would have the seller write a letter to us that simply says “I instruct you to not pay the deposit to the seller until I give further instructions.”  This way we have a legitimate written instruction from the client. 

You will notice that Section 28(2)(a) above says that the parties can agree in writing that the brokerage does not hold the money as a stakeholder.  This would seem to suggest that when we act for a buyer in a real estate transaction, we could write further clauses into the contract that have the parties agree that the brokerage does not hold the deposit as a stakeholder but instead holds the deposit on behalf of the buyer and could release that deposit to the buyer if they don’t remove their subjects. This requires further research and certainly a prudent seller will not agree to this lack of protection.

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