A word from The Tim: This post is from long-time Seattle Bubble participant Kary Krismer, managing broker with John L. Scott/KMS Renton. Kary’s expertise in both real estate and law gives him a good perspective on issues like this tweak in earnest money law here in Washington State. Thanks, Kary!
Disputes over the release of earnest money are extremely rare, but anyone who has ever been involved with one knows they can be an extremely miserable experience. For a buyer with limited funds it can mean a lengthy delay in being able to make an offer on another property. For both parties it can be very emotionally draining and expose them to the potential of paying attorney fees—both their own and those of the other party.
The most common scenario for an earnest money dispute is after a buyer terminates a contract based on the Form 35 inspection contingency. That contingency is based on a subjective standard, so assuming the buyer’s agent followed proper procedures to give notice, and that there’s no element of “bad faith” in the contract process, the buyer should be entitled to the return of their earnest money. Unfortunately the seller may act in an irrational manner, and refuse to sign the documents that an escrow will likely require allowing the return of funds. Escrows usually will require the signatures of all the parties because they do not want to risk being sued for an incorrect return of the funds, particularly on a transaction which they will not be making any money.
The NWMLS statewide forms (e.g. Form 21) attempted to deal with this problem by setting up a notice procedure which would allow the escrow to release the earnest to the party demanding it. Unfortunately very few escrows have been willing to follow that procedure, and not being a party to the contract, they have not been required to follow that procedure. Instead, if the parties did not come to an agreement the escrow would eventually deposit the earnest money into a Superior Court registry by initiating an interpleader action.
Fortunately the legislature has noticed this problem and passed HB 1730 (pdf) which applies to residential real property transactions. HB 1730 does several things. Most notably it requires that within 15 days after receipt of a written demand for the earnest money that the Holder of the earnest money:
- Send a notice to all the other parties to the contract;
- Release the funds to the demanding party; or
- Interplead the funds.
A Holder following either option 1 or 3 will be protected from liability. Assuming a notice is sent, it will give the other parties 20 days to object to the release of the funds, and give them an address to send their objection. If no response is received within the 20 day period, the Holder has ten days to release the funds to the demanding party. If an objecting response is received, then the Holder has 60 days to commence an interpleader action, absent further agreement of the parties.
The notice is required to be sent to the known address and email addresses of the parties, and the Holder is not required to look outside its records to find an address. This makes filling in the address or email address (preferably both) of the parties on the purchase and sale agreement critical, as well as notifying the Holder of any change of address. [Note: It is somewhat unlikely the Holder would know the parties’ email addresses until after the parties return the Holder’s “Open Package.”]
HB 1730 is not effective until July 24, 2015, but it is effective as to any earnest money held on that date. That means that real estate agents should make sure at least the mailing addresses of the buyer(s) and seller(s) are included in their current purchase and sale agreements, as well as their email addresses if possible. And it also means that buyers and sellers should check to make sure those mailing addresses are included on any contracts that they sign. It is not exactly clear what will happen if that information is not provided, but one likely possibility is the escrow will start an interpleader action within 15 days of the demand for earnest money, and if that occurs, HB 1730 requires the court to pay the Holder their attorney fees and costs, leaving less money for the buyer(s) and seller(s) to fight over.
Disclaimer: This piece is not intended to be legal advice, but is merely the author’s understanding of the operation of the new legislation. Persons needing or wanting legal advice would need to contact and hire their own attorney. Real estate brokers may want to also contact their designated brokers.