OAR 863-015-0135 Offers to Purchase.

OAR 863-015-0135 is the administrative rule the Real Estate Agency has developed to dictate how real estate licensees will handle offers to purchase. Among the provisions of the rule, is language dealing with earnest money. Under OAR 863-015-0135(5), the type of earnest money, whether in the form of cash, a check or promissory note must be stated in the “document serving as the earnest money receipt.”

In the old days, buyers were given a separate “earnest money receipt.” Over time, these “receipts” became part of “earnest money agreements.” Today, the “document serving as the earnest money receipt” is the sale agreement form. The requirement contained in OAR 863-915-0135(6) is incorporated into the sale agreement in the form of a “receipt for earnest money” clause.

Further, OAR 863-015-0135(7) requires that if a promissory note is used for earnest money, “a licensee must make the note payable upon the seller’s acceptance of the offer or payable within a stated time after the seller’s acceptance.” This requirement is based on the legal requirement that promissory notes must be due at a “time certain.” Making a note “due on closing” violates the rule because “closing” is not certain to happen. There are endless variations on the contingent due date theme. This and other problems associated with the use of promissory notes are covered in the Understanding Earnest Money section of this subject.

The Real Estate Agency has also seen fit to admonish licensees in OAR 863-015-0135(7) that “absent a written agreement to the contrary, the note must be made payable to the seller” This advise is based on the fact that a note can be enforced only by its “holder.” The holder of the note is the person the note is made out to or the person a previous holder has transferred the note to.

OAR 863-015-0135(7) says the seller is ordinarily the holder of a note for earnest money. The “in the absence of a written agreement to the contrary” language accommodates an industry tradition of having the note made out to the broker. This tradition is facilitated in commonly used note forms. The utility and wisdom of this practice is discussed in the Understanding Earnest Money section of this subject.

OAR 863-015-0186 Clients’ Trust Accounts — Disbursal of Disputed Funds.

OAR 863-015-0186 is a provision of real estate law concerning disbursal of disputed funds held in a client trust account. The rule is a direct response to the problem of earnest money being held hostage by the seller when a buyer backs out of a transaction. Prior to enactment of this rule, brokers were often dragged into nasty disputes between buyers and sellers over who was entitled to the earnest money when a deal failed. Such questions are legal questions and, therefore, beyond the expertise of a real estate broker. OAR 863-015-0186 acknowledges this reality and forces the parties to either settle their differences by mutual agreement or initiate legal action within a short period of time after a dispute arises.

Under OAR 863-015-0186, a real estate broker may disburse disputed funds (typically earnest money) held in their client trust account simply by giving notice to both parties and waiting twenty (20) days before returning the money to the buyer. “Disputed funds” are funds delivered to the broker pursuant to a written contract and the parties dispute entitlement under that contract. Disbursal under the rules is completely discretionary with the broker who remains free to hold or disburse the funds as they might have before OAR 863-015-0186 was enacted.

In order to use the new rules, the broker must, as soon as practicable after receipt of a demand for the disbursal of disputed funds, deliver written notice to all parties that a demand has been made and that such funds may be disbursed to the party who delivered the funds to the broker within 20 calendar days of the date of the demand. The form of the notice to be given is set out in the rule and must include a warning that the broker has no authority to resolve the dispute and that the funds will be disbursed unless the parties reach agreement or initiate legal action within 20 days of the date of demand. Both parties must be warned to seek legal advice. Oregon Real Estate Forms publishes a form for brokers to use.

Dispersal of earnest money under this rule does not affect anyone’s legal claim to the money. There is no requirement that brokers use this procedure but if they do, their responsibility for the earnest money is ended. The rule applies only to disputed funds and does not prevent disbursement of funds in other situations or prevent brokers from handling disputes in other lawful ways, including filing an interpleader action. The provision is simply a way to prevent disputed earnest money from being held hostage in broker client trust accounts.

OAR 863-015-0255 Records: Client Trust Account Requirements.

OAR 863-015-0255 is the Real Estate Agency’s records rule. Records include records for the broker’s client trust account. Because earnest money often ends up in a client trust account, many of the provisions of the rule affect the handling of earnest money. Earnest money ends up in client trust accounts because under OAR 863-015-0255(3) a real estate agent must transmit to their principal real estate broker any money, checks, drafts, warrants, promissory notes or other consideration that comes into their possession. Once money is in the principal broker’s possession, ORS 696.241 forces the principal broker to put it in the client trust account unless provisions have been made for direct deposit to escrow.

Earnest money can be deposited directly to escrow only if the office has a written company policy to that effect, or the parties agree in writing to that result. Almost all brokers have written company policies allowing direct deposit in escrow. Standard contract forms universally contain provisions for deposit directly to escrow. It is, therefore, common in Oregon for earnest money to be deposited directly in escrow. Indeed, it is believed that less than half of all brokerages even have client trust accounts. Trust account or not, the real estate broker is still required to track the earnest money deposit from the buyer to the escrow depository.

When earnest money is not directly deposited in escrow, holding onto the money becomes an issue under OAR 863-015-0255. If a check is used as earnest money, the real estate broker may hold the check until the offer is accepted or rejected if the sale agreement used allows that and states where and when the check will be deposited upon acceptance of the offer. Form contracts in common use in Oregon contain the necessary language for holding earnest money checks until acceptance. However, once there is acceptance, the check must be deposited into a clients trust account or escrow “before the close of the third banking day following acceptance of the offer or a susequent counter offer”

If a promissory note is used for earnest money, the broker must record and track the transfer of the note by a ledger account or by other means including, but not limited to, written proof of transmittal or receipt retained in the real estate broker’s offer or transaction file. The use of promissory notes for earnest money is now the most common way earnest money is handled in Oregon. That practice is not without its difficulties, many of which are discussed in Understanding Earnest Money.
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