Single party addendums are statements, disclosures, waivers, notices and the like that are associated with a real estate deal. Strictly speaking, sure things are not “added” to an offer or a contract or anything else. They are stand alone additional documents exchanged between the parties during a transaction.

Take a document used to give notice for instance. “Notice” is simply a statement informing someone of a fact. Notice does not require agreement of any kind. Notice is given because one party has a right to some information and the other the duty to communicate it. A document used to give notice is, for that reason, an example of a single party document.

Using standard addendum forms to communicate single party statements, disclosures, waivers, or notices can cause confusion. Because addendum forms are intended to add terms to offers or modify existing contracts, they contain agreement language and signature blocks for both parties. It is, therefore, not uncommon to see one party try to “reject” the other party’s notice or disclosure or for agents to run around after the deal has closed trying to get additional signatures on documents that require only one signature.

Using mutual agreement forms in single party situations is common when deals go bad. For instance, a buyer or seller who wants to terminate a transaction because a contingency has failed or the other party has not performed will often use a mutual agreement addendum in the form of a termination agreement to accomplish their end. When the other side rejects the addendum, the whole deal goes into limbo casting doubt on the disbursement of the earnest money and the marketability of the property. Click here for a detailed discussion of contract termination issues.

The key to avoiding confusion in the use of single party addendums is to always ask whether what is being communicated requires the other party’s agreement. A disclosure, for instance, is just a form of notice. It, therefore, does not require agreement signature blocks. That is not to say that it might not be a good idea to have a way for the other side to acknowledge receipt, just that there is no need for agreement to disclosures. This problem is discussed more fully in the next section of this subject when dealing with Disclosure Addendums or Do Nothing Addendums.
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Mutual agreement addendums are used to modify existing agreements. Unfortunately, the same form with the same three checkboxes is used as is used to make an addendum to an offer or counter offer. The potential confusion is exacerbated by the practice of using the name “sale agreement” for both the buyer’s offer and the resulting contract once there is acceptance. Basically, rather than agreements to modify and additional terms forms, one “addendum” form is used for both uses.

Because the use is not clear from the content of the form, only the context in which the form is used tells you what it is. When used to make modifications to an existing contract, mutual agreement addendums do not normally affect the formation, validity or enforceability of the underlying contract. Typically, mutual agreement addendums propose a modification that may be accepted or rejected by the other party without calling into question the existing agreement between the parties.

Like everything else in law, there are exceptions to the general rule that requests for modification of an existing contract has no affect on the contract itself. When it comes to modifications of existing contracts, the exception that is implicated is created by the doctrine of repudiation. Repudiation is a positive statement refusing to perform an otherwise binding agreement. Repudiation raises the issues of anticipatory breach of contract. Click here for a detailed discussion of anticipatory breach issues.

Under the doctrine of anticipatory breach, a positive statement of intent not to perform a contract can sometimes be considered a material breach excusing the other party’s duty to perform the contract. This arcane legal doctrine is probably at the bottom of one of the most ill-founded and long-running real estate myths ever to appear. That myth is that a request for repairs made through a mutual agreement addendum is somehow a “counter offer” which, if the seller “rejects,” ends the transaction.

An addendum to an already formed contract, requesting repairs or anything else, is not going to affect the underlying contract except under the most unusual of circumstances. Instead, a mutual agreement addendum is simply a request to modify the terms of the contract. The other party to such a request is, of course, free to reject the request. They can counter with different or additional terms; all without having any affect upon the existing agreement. In that sense, but only in that sense, it is like offer and acceptance. What you are looking for is a meeting of the minds – not on the contract – but on the modification itself.

Because proposing changes to an existing contract is like offer and acceptance, all the problems associated with offer and acceptance apply. Click here for a detailed explanation of contract formation. So, for instance, if the buyer sends the seller an addendum proposing new terms and the seller accepts the addendum by signing it, but also crosses out one of the terms, you have acceptance varying the terms of an offer or a counter offer. Single signature problems, grumbling assent and all the rest of the problems that can arise in offer and acceptance can arise in mutual agreement addendums.

The key, as with formation addendums, is to always understand the context in which an addendum form is being used. Here, that context is a request for modification. Don’t think generically: “addendum.” Think contextually: additional terms to offer or modification request. In that way, many of the problems associated with the use of generic “addendum” forms can be avoided.
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If you look at a standard addendum form, you will usually see checkboxes across the top where the person using the form can indicate what the addendum is being added to. Typically, the checkbox choices are: real estate sale agreement; the seller’s counter offer; and the buyer’s counter offer. Whatever the exact choices, addendum forms always contain separate signature blocks for both buyer and seller.

In real estate, a “sale agreement” is just the buyer’s offer until it is signed by the seller. The same goes for the seller’s or buyer’s counter offer: they are just offers until signed by the other party. An offer or counter offer becomes a contract upon acceptance. Acceptance and, therefore, formation of the contract happen when the offeree signs the offer and dispatches it to the offeror. Click here for a detailed discussion of acceptance. Adding addendums to offers, especially addendums with signature blocks of their own, can cause serious problems if not handled properly.

Formation addendums are really additional terms to an offer proposed by one party. Say, for instance, the buyer wants their offer to be contingent on a due diligence period during which they will perform certain inspections. The contingency they want is too complicated to be written into the “additional provisions” clause of their offer, so they attach an inspection addendum form to their offer. Now there are four signature blocks on the offer – two on the sale agreement form and two on the addendum.

Hopefully, the buyer signs both the sale agreement signature block and the addendum signature block when they use an addendum form to add terms to their offer. Hopefully, the same is true of the seller but the truth is, the seller has the opportunity to sign only the offer, only the addendum or, as they should, both. Human nature being what it is, each of the three options actually happen in real estate transactions.

Only when both parties sign both documents is there no problem. Any other variation will result in formation problems. If the buyer fails to sign the addendum, questions are raised about whether the addendum was a term of the offer. Clearly, if transmitted at the same time as the offer itself, it is intended as part of the offer. What then when the seller accepts the sale agreement form without signing the addendum? Is the result different if the seller signs only the addendum?

We know contract formation is about mutual assessment and mutual assessment is about intent. Click here for a detailed discussion of contract formation. We also know that writings and signatures are required by the Statute of Frauds, but that the Statute is asymmetrical, riddled with exceptions and has nothing to do with whether a contract exists or not. Click here for a detailed discussion of the Statute of Frauds. Thus, a contract formed with addendums that is not signed by all parties create complicated legal issues of intent and application of the Statute of Frauds.

So unpredictable are cases concerning intent to form a contract and the Statute of Frauds that about all that can be said is that real estate licensees must do everything they can to avoid such situations. If mistakes are made, do not be quick to believe they can be used to advantage to get out of a contract or avoid a term the other side believes has already been agreed to. Do not be quick to jump to the conclusion that you have an enforceable contract either. If the proper signature cannot be gained, it is time to advise your clients to seek the advice of a lawyer.

Formation addendum problems can arise at any stage of the contract formation process. A particularly common place for problems, however, is the buyer’s counter to the seller’s counter. It is tempting at this point for a seller who wants to make changes to the buyer’s counter offer to “accept” the counter offer and attach to it an addendum with the desired changes. This manner of doing business creates real confusion because the seller intends another counter offer, but the paper work looks like acceptance coupled with a separate request for a mutual agreement addendum.

The solution to formation problems stemming from the use of standard addendum forms is diligence. Be aware of the use intended when using addendum forms and make sure that use is clearly communicated to the other party. Make certain the needed signatures are obtained on both sides. Do not be quick to declare terms included or contracts “dead.” If a disagreement over the meaning of addendums used during the formation of a contract cannot be resolved by the parties, it is time to advise legal consultation.
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“Addendum” has no special legal meaning. If you look the word up in a legal dictionary, it will say the same thing it does in a regular English dictionary. An addendum is “something added.” That’s it! An addendum is something added to something.

Because the word “addendum” has no special legal meaning, the legal effect of a document entitled “addendum” will depend on the context in which the document is used, not what it is called. This simple concept causes no end of trouble in real estate transactions. Addendums, and addendum forms, are used for all kinds of different purposes in real estate transactions. It is the confusion among those purposes that causes trouble.

Addendums are attached to offers and to counter offers as well as to contracts that have already been formed. Addendums are used to give notice, make disclosures, communicate waivers and even just to make a request of the other party. There are special purpose addendums like the lead-based paint addendum. Addendums are also used to create special contingencies for financing, title inspections and more.

Formation Addendums are used to add additional terms to an offer or counter offer. Addendums used to create special contingencies or otherwise modify the terms of existing agreements are Mutual Agreement Addendums. Agents will often use an addendum form to make disclosures, give notice or make waiver statements. Such Single Party Addendums can cause significant confusion if they are mistaken for formation or mutual agreement addendums. Finally, there has arisen in recent years broker-generated addendums, Disclosure Addendums or Do Nothing Addendums, that make various general disclosures about real estate without having anything to do with the transaction to which they are attached.
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Location: https://oregonrealtors.org/rmt_article/understanding-earnest-money/

Earnest money has been part of real estate sales for longer than anyone can remember. However, there remains substantial confusion surrounding earnest money in real estate today. For years, it was common to hear that a contract for the sale of real property was “illegal” or “void” unless the buyer paid earnest money at the time of contract. It was thought that without earnest money there was no consideration to support the contract. It is simply not true as a matter of contract law that a contract for the sale of real property must have earnest money to be valid or enforceable.

The origin of the “must have earnest money at the time of offer to be valid” myth is lost in time. There are, however, some clues that may point to the origin of the myth. Historically, (we are talking 19th century here) in the commercial sale of goods, the part payment of the purchase price, or delivery of part of the goods, was taken as evidence or ratification of the sale. This part payment or delivery was called “earnest” or “earnest money.” Earnest was a convenient and speedy way to evidence agreement in a sale of goods made by verbal offer to sell, standard order form or handshake.

Prior to the wide availability of lender financing after World War II, most real estate was purchased on a financing contract with the seller. Seller finance contracts were essentially installment contracts where the seller retained title until, and unless, the buyer made all the payments. The negotiation and drafting of such installment contracts made purchasing property uncertain because it took time to work out the details (it still does and modern real estate contracts now contain express seller financing or land sale contract clauses). During the time a land sale contract was being worked out, the buyer had no real claim to the property. “Earnest money agreements” were an early solution to this problem borrowed from the tradition of “earnest” in the commercial sale of goods.

Early earnest money agreements were essentially offers to make a contract. They were more like a modern letter of intent, where the parties agree they will make a contract in the future than a modern contract for the sale of real property. Pre-WWII, earnest money agreements were not bilateral contracts for the sale of the property and, therefore, (like a modern letter of intent) not enforceable unless backed by some consideration. The necessary consideration was the “earnest money” pledged and receipted for in the earnest money agreement. It was paid at the time the earnest money agreement was offered so that, if accepted, the agreement to form a contract would be backed by consideration.

It is easy, given this history, to see how earnest money became tied to consideration for the contract. As “earnest money agreements” morphed over time into true bilateral contracts, the need for earnest money as consideration disappeared. Earnest money itself, of course, did not. The reason it did not disappear can be seen in the modern legal definition of “earnest money: A sum of money paid by the buyer at the time of entering into a contract to indicate the intention and ability of the buyer to carry out the contract.”

Put simply, earnest money is used by buyers today to show sellers they are serious. Signaling to sellers that the buyer is serious about carrying out the purchase is a reasonable business need on both sides of a real estate contract. This, and the vagaries of contract law, explains the survival of the practice of the buyer pledging earnest money in a contract for the sale of real property. It does not, however, explain the manner in which earnest money is handled in the real estate industry today.

The administrative rules promulgated by the Real Estate Agency assume collection of earnest money, in one form or another, by the licensee writing the offer prior to the offer being presented to the seller. Click here to view the applicable administrative rules. Until the advent of buyer agency in the late 1980s, earnest money was collected from the buyer by the seller’s agent. This, in effect, transferred the money from the control of the buyer to control of the seller.

The transfer of control of earnest money to the seller’s agents was not completely consistent with the intent and ability purpose of earnest money. It was, however, completely consistent with the sales industry idea that earnest money should be available to compensate the seller for taking the property off the market, making repairs and otherwise changing position in reliance on the buyer’s intent to purchase. It is this dual purpose – evidence of ability and intent, and source of compensation if the deal fails – that complicates the way earnest money is handled.

In order for this seller compensation purpose to work, the money had to be placed out of the control of the buyer so it was available if the seller became entitled to it. At the same time, earnest money had to be out of the control of the seller so it could be returned to the buyer if the transaction failed through no fault of the buyer. Two solutions to this dilemma quickly evolved. One was for the seller’s agent, or subagent, to place the money in a client trust account opened and operated by the broker. The other was to place the money in escrow as soon as escrow was opened on the contract. Both methods placed the earnest money out of the unilateral control of either party.

Initially, almost all earnest money was kept in broker client trust accounts. This was an extremely efficient way to handle earnest money. There were, however, problems. One problem was what to do about agents holding the money while they waited to see if the seller would accept. Another was the broker getting caught in the middle of a dispute over the earnest money if the deal later failed. The first problem was solved by administrative rules detailing how various forms of earnest money were to be handled. Click here to view the applicable administrative rule. The second problem was papered over for years but never resolved.

The idea that earnest money should compensate the seller if the buyer failed to perform transformed earnest money from a positive indication of financial wherewithal to an a priori measure of damages. Rather than simply an indication of intent and ability to perform, earnest money became the source of funds to pay damages if the deal failed. The shift from a source of confidence in the buyer’s financial position to the source of funds to pay damages is subtle but critical to understanding the modern use of earnest money.

Using earnest money as an a priori measure of damages raises the legal issue of “liquidated damages.” Liquidated damages are the sum a party agrees to pay if the party breaches a contract. Liquidated damages must be a good faith estimate of the actual damages anticipated by a breach. They must be reasonable in light of the anticipated or actual harm caused by the breach. If liquidated damages are set too high, that is if they are unreasonable, they risk being declared a penalty and are not enforceable.

There is no bright line between a reasonable estimate of damages and a penalty. There is a famous Oregon court case where a forfeiture of $50,000 in earnest money on a $500,000 purchase is considered a penalty and not enforced. On the other hand, $5,000 forfeitures on $500,000 properties are routine and rarely contested as penalty. Somewhere between these extremes is the line between reasonable estimate and penalty.

Wherever the line between estimate and penalty may exist, forfeit of earnest money is rarely a simple matter. Although often missed by sellers (and sometimes their agents) the seller has no right to earnest money other than as specified in the contract. There is no general rule that the seller gets the earnest money if the buyer doesn’t perform. Instead, the seller gets the earnest money if the contract pledges the money to the seller under certain circumstances and those circumstances are proved to have occurred.

The circumstances under which a seller may claim earnest money under a real estate contract vary with the contract. It is, therefore, necessary to read the contract to determine the legitimacy of a particular claim to legal entitlement to the money. Reading contracts to determine the validity of a legal claim is the practice of law. Real estate licensees cannot practice law. It is never a good idea for a real estate licensee to advise a buyer or a seller on entitlement to disputed earnest money.

Most earnest money disputes fall within the $10,000 jurisdictional limit for small claims court actions. The sale forms used in Oregon direct claims within the jurisdiction of small claims courts to the small claims court exclusively. Given that most earnest money is now held in escrow where it cannot be released without separate signed instructions from either party, most earnest money disputes end up being resolved by one side or the other simply giving up, or the parties reaching some compromise or a small claims trial.

Small claims courts are county courts, making earnest money disputes strictly local matters. Attorneys are not allowed in small claims court. Filing a small claims action is not free but it is not expensive either. Each county has a separate small claims department but the process is generally standardized across the state. Most counties now have websites that explain the process and even provide copies of the necessary forms.

Earnest money disputes most often involve disagreements over failed contingencies. Disputes arise, for instance, when the seller believes the buyer has not used the inspection contingency correctly, or when the deal fails at the last minute due to financing. Often, these disputes involve serious misunderstandings of the law or assumptions regarding buyer or seller motivation. The inability of real estate licensees to give legal advice makes it extremely foolish for an agent to offer any opinion regarding the likely outcome of a small claims action over earnest money.

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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ORS 696.241 Clients’ Trust Accounts; notice to agency; authority to examine account; branch trust account; interest earnings on trust account; when broker entitled to earnest money; funds not subject to execution; rules.

ORS 696.241 is the state statute that controls broker client trust accounts. As such, it implicates the collection, holding and disbursement of earnest money. Under ORS 696.242(1), each principal real estate broker must maintain in the state a clients’ trust account in which all trust funds received from clients must be deposited, unless the parties agree in writing to place the funds directly in escrow. If the parties do agree to place the funds directly into escrow, the licensed escrow must be in Oregon.

It is not hard to see the impact of ORS 696.241 on earnest money practices. The law demands deposit of earnest money received or handled by a real estate licensee in a clients’ trust account or, with the written agreement of the parties, into a licensed neutral escrow depository. There are no other choices. The statutory requirement immediately raises the issue of how long an agent can hold funds before they must be deposited as required under the statute. It also raises the issue of whether it is “better” to put earnest money into a client trust account or directly into escrow.

Whether to place earnest money directly into escrow is a business issue discussed in the Understanding Earnest Money section of this subject. The time an agent can hold earnest money is handled by administrative rule and is discussed in the Administrative Rules Affecting Earnest Money section of this subject. These holding rules depend upon the form of the earnest money: for instance, earnest money in the form of a check or a promissory note or cash.

Whatever the form of the earnest money, the single biggest issue with earnest money is always who gets it when the deal fails. This issue has plagued real estate brokers for years. It is for that reason that ORS 696.241 was amended by the Legislature in 2005 to require that the Real Estate Agency establish a procedure for the disbursal of disputed funds held in client trust accounts. See ORS 696.241(10).

According to the statute, the administrative rule must allow for disbursal to the person who gave the broker the money within 20 days of a request for disbursal. The disbursal, however, does not affect entitlement to the money. In effect, the Legislature directed the Real Estate Agency to develop a procedure by which brokers could move disputed earnest money out of their client trust accounts in an expedited manner. The Real Estate Agency responded with OAR 863-015-0186, an administrative rule to accomplish the legislative mandate. The rule is discussed in depth in the Administrative Rules Affecting Earnest Money section of this subject.

ORS 696.243 Substituting copy for original canceled check allowed; electronic fund transfers.

ORS 696.243 is a relatively new provision of real estate law made necessary by modern electronic banking practices. Under the statute, real estate agents who are required to maintain canceled checks used to disburse money from a licensee’s clients’ trust account may substitute a copy of the original canceled check with an optical image or other process that accurately reproduces the original or forms a durable medium for reproducing the original. In addition, brokers and property managers may use electronic fund transfers for the deposit into or for withdrawal from a clients’ trust account established under ORS 696.241. The statute was thought necessary to authorize modern banking practices and has no substantive effect on earnest money rules.

ORS 696.581 Written escrow instructions or agreement required; statement; instructions containing blank prohibited; one-sided escrow.

ORS 696.581 is the state law under which escrow is opened and closed. Two provisions of the law affect earnest money. According to the statute, an escrow agent may not accept funds in any escrow transaction without dated, written escrow instructions from the principals to the transaction or a dated executed agreement in writing between the principals to the transaction. Typically, escrow is opened on a dated executed agreement in writing in the form of a sale agreement. It is for this reason that how earnest money is to be handled, if it is to go to escrow, must be detailed in the sale agreement itself.

The second way ORS 696.581 affects earnest money is in its disbursal. An escrow agent may not close an escrow or disburse any funds or property in an escrow without obtaining “dated, separate escrow instructions in writing from the principals to the transaction.” This provision effectively traps earnest money in escrow if there is a dispute. That is the case because escrow can release the earnest money only if the parties separately agree to that result, unless earnest money is to be released pursuant to a court order.

Because ORS 696.581 requires “separate” signed written instructions, there is no way to have an a priori agreement regarding the disbursal of earnest money. Thus, a provision in a sale agreement that dictates who will receive the earnest money under what circumstances is ineffective if the parties to that agreement refuse to sign separate disbursal instructions in escrow.

The effect of ORS 696.581 is seen in commonly used termination agreement forms. A significant part of such agreements are the escrow cancellation and disbursement instructions. On the form, the parties agree to the disbursal of the earnest money. Notwithstanding agreement to disburse the funds, the parties also “mutually agree to sign any further documentation, including a release of Escrow for making the above disbursement reasonably required by the Principal Broker or Escrow.”

One of the “further documents” is the separate instructions required by ORS 696.581. Thus, the release of earnest money from escrow remains in doubt even after the parties have signed a termination agreement. These matters are discussed further in the Understanding Earnest Money section of this subject.
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Earnest money is a critical part of real estate sales. The collection, retention and disbursement of earnest money is something every real estate agent must understand and deal with. The subject is fraught with peril for the unwary agent. Disputes between buyers and sellers over earnest money are common and brokers are often caught in the middle. The use of checks and promissory notes further complicate the handling of earnest money.

A number of state laws and rules dictate the handling of earnest money from initial collection to final disbursement. The rules are arcane, complicated and not altogether consistent. Practices have grown up in the industry which complicates the handling of earnest money even more. All these factors work together to make earnest money a complicated subject.

It is important to notice first that the Statute of Frauds says absolutely nothing about the formation of contracts. The statute doesn’t address the enforceability of a contract directly. Instead, it establishes a rule of evidence for use in Oregon courts. The common understanding that the Statute of Frauds makes certain contracts that are not in writing “illegal” is simply wrong.

What the Statute of Frauds says in reality is that certain evidence cannot be admitted in court to prove the existence of particular kinds of agreements. Without the required evidence, the agreement is considered void. “Void” here means of no legal force or effect. So the Statute of Frauds says certain agreements will not be enforced (not that they don’t exist) unless the proper evidence is introduced in court. As you can see, that has nothing whatever to do with the contract itself.

Not only does the Statute of Frauds have nothing to do with the contract itself, it requires more than just that the “contract” be “in writing.” Indeed, the Statute doesn’t even mention “contracts.” Instead, it speaks in terms of an “agreement” or some “note” or “memorandum” of an agreement. This agreement or note or memorandum must “express” the consideration for the agreement and be “subscribed by the party to be bound.” “Subscribed” means signed at the end of a document.

A more accurate restatement of the Statute of Frauds, for real estate purposes, might be that an agreement for the sale of real property, lease for a year or more or a listing, or some note or memorandum regarding the sale, lease or listing, must be in writing, express the consideration and the person against whom you want to enforce the agreement must have signed at the end of the document. This restatement is important because it draws out a number of unintuitive aspects of the Statute.

First, the Statute of Frauds is asymmetrical. That is the case because the only signature necessary is the signature of the person against whom the agreement is being enforced. For instance, a seller who signed a sale agreement accepting an offer a buyer did not sign could not use the Statute of Frauds to defend against a suit by the buyer, but the seller could not enforce the contract against the buyer. This asymmetry makes possible the other important unintuitive aspect of the Statute of Frauds: you don’t really need a written contract at all.

As mentioned above, the Statute of Frauds talks about an “agreement or some note or memorandum thereof.” Suppose I drop my mother a note that says “I agreed to sell my house to Bill Smith for $250,000” and I sign the letter. Can Bill Smith use the letter to my mother as evidence of an agreement to sell my house? Yes, he can! Can I use the letter against Bill if he backs out of the deal? No, I cannot because he didn’t sign anything. How about using an addendum signed by both parties that references a sale agreement neither signed? Sure, either party could use it to satisfy the Statute of Frauds but that doesn’t mean there was actually a contract. Whether there was actually a contract in the first place is never a Statute of Frauds issue.

As you can see, the Statute of Frauds is not as straight-forward as commonly believed. Actually, the worse is yet to come. Because the Statute of Frauds is a rule of evidence, courts do not consider it a substantive provision of law that makes all agreements that fall within its preview void if they do not meet the requirements of the Statute. Instead, courts will consider whether there is other evidence of the existence of an agreement and if there is, and injustice would result from not enforcing the agreement, they will take the agreement “out of the Statute of Frauds.” This neat judicial trick makes it very unwise to rely on the Statute of Frauds to avoid a contract that actually existed.

A person who uses the Statute of Frauds to avoid a contract actually agreed to is committing a fraud himself. They are using a rule of evidence to avoid doing something they actually agreed to do. Courts do not like being party to such manipulation and will avoid it if they believe it to be happening. It is for this reason courts hold that a contract the terms of which have been partially performed, is “taken out of the Statute of Frauds.” Courts will also enforce an oral agreement notwithstanding the Statute of Frauds if there is other evidence there was a contract and one party relied on the contract to their detriment. In an ordinary real estate transaction or listing agreement, either or both of these factors will come into play almost immediately – which explains why such contracts are almost never successfully avoided using the Statute of Frauds.
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The operative language of the Statute of Frauds in Oregon reads: “In the following cases the agreement is void unless it, or some note or memorandum thereof, expressing the consideration, is in writing and subscribed by the party to be charged, or by the lawfully authorized agent of the party; evidence, therefore, of the agreement shall not be received other than the writing, or secondary evidence of its contents in the cases prescribed by law.” Three of the eight types of contracts named in the statute involve real estate.

The three types of real estate contracts affected by the Statute of Frauds are: (1) An agreement leasing property for longer than one year, or for the sale of real property, or of any interest therein; (2) an agreement concerning real property made by an agent of the party sought to be charged unless the authority of the agent is in writing; and (3) an agreement authorizing or employing an agent or broker to sell or purchase real estate for a compensation or commission. In other words, leases longer than a year, sale agreements, powers of attorney, and listings all fall under the Statute of Frauds.
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