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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