Every day, deposits and other forms of trust funds are deposited, held and disbursed from trust in relation to real estate purchase contracts, offer to lease agreements, residential tenancy agreements, property management agreements and mortgage administration agreements. In nearly all cases, trust monies are disbursed in accordance with the terms of trust that govern it without any difficulties. Sometimes, though, a conflict will arise over the disbursement of these monies.

The Real Estate Council of Alberta (RECA) receives questions and complaints every year pertaining to the disbursement of trust funds in relation to most industry sectors. Questions and complaints arise when someone questions the entitlement or disbursement of trust funds.

Service agreements used by industry members typically include provisions with respect to the disbursement of trust funds. However, the terms of trust in these contracts may not always be clear and comprehensive to the parties to the contract, and situations may arise where multiple parties to the trade or deal claim entitlement to the trust funds when a trade or deal collapses.

This article attempts to describe the duties of brokers as trustees, suggest processes and strategies to prevent disputes, and provide a methodology on how to deal with trust deposit disputes. These concepts are applicable in the mortgage brokerage, mortgage administration, property management, commercial and residential real estate brokerage sectors.

Broker has a duty to act as a trustee

Section 1 of the Trustee Act defines a trustee as someone “whose trust arises by construction or implication of law as well as an express trustee.” 

Sections 18 and 25 of the Real Estate Act presume the role of the broker to be that of a trustee as it relates to the handling of trust funds. As a trustee brokers normally have at least two duties. These duties are to:

1.   Hold the trust monies for the parties to the transaction; and
2.   To disburse money in accordance with the terms of trust.

While the brokerage may be representing one of the parties to the trade or deal, as is most often the case, the broker, as trustee, cannot act on behalf of, or in favour either party.

Written terms of trust

Section 18(2) of the Real Estate Act prohibits industry members from accepting trust funds without written terms of trust.  Section 25(2) of the Real Estate Act requires industry members to ensure that terms of trust governing the use of trust monies are in writing and agreed to by the industry member and all other parties to the trade or deal.

Usually, the terms of trust are contained in two documents.

1. The service agreement that describes how the trust funds will be disbursed between the brokerage and the client. These service agreements include, but are not limited to, property management agreements, mortgage administration agreements and listing agreements. While these contracts can relate to disbursements made on behalf of the client to other parties, they also often describe how and when the broker will receive remuneration from the client.
2. Contracts between parties to the trade or deal usually set out that the trust funds will be held and disbursed between the parties depending on a certain set of facts (as in the Alberta Real Estate Association’s residential purchase contract terms of trust).

Trustees may not deviate from the written terms of trust

Often, one of the parties to a trade or deal will claim the deposit or object to the deposit being disbursed to the other party on the basis that they do not feel the other party undertook reasonable actions to meet the terms of the contract. Brokers acting as trustees cannot take into consideration these arguments. Brokers have a duty to make decisions solely based on the terms of trust. For example, a commercial contract may stipulate trust funds be held in an interest-bearing account at a particular bank. The trustee would not have discretion to place the funds elsewhere, even at a higher return. Trustees must act only within the authority granted to them under the terms of the contract.

Brokers acting as trustees often encounter situations whereby the outcome of disbursing the trust funds in accordance with the terms of trust results in a situation with which parties to the contract disagree. Brokers acting as trustees should recognize that this likely results from terms of trust that appear to favour one party to the transaction, regardless of the terms of trust having been mutually agreed to by all the parties to the transaction.

As previously mentioned, the brokerage holding the trust funds is often representing one of the parties to the transaction. Brokers acting as trustees must not let the fact that they may be representing a party to the transaction influence their decision. 

Brokers acting as trustees cannot arbitrarily add or impose conditions on the terms of trust without the written consent of all parties for whom the trust funds are being held.

How to prevent disputes

RECA’s experience suggests that brokers often have difficulty disbursing trust funds when the terms of trust are ambiguous.

The best way for to prevent trust disputes is to ensure the brokerage has clear policies that require associates to:

1. Clearly explain to their clients the terms of trust as proposed by the other party to the trade or deal and its implications. 

For example, an associate representing a vendor may want to explain that “subject to a home inspection satisfactory to the buyer” means that the buyer can choose not to proceed with the transaction if cosmetic defects or imperfections are present. In this situation the vendor may choose to accept the terms of trust as proposed knowing that the buyer can walk away with little reason or may choose to counter with new terms of trust.

2. Advise their clients to use and draft clear, ascertainable and unambiguous conditions. The more precise the condition, the less likely that the broker acting as trustee will have difficulty disbursing the trust funds.

3. Draft dispute resolution processes in case the broker acting as trustee can make no reasonable conclusion in regard to entitlement to trust monies.

4. Advise their clients that they instruct the trustee by the terms stipulated in the contract. The funds deposited are for the benefit of all parties to the contract. The trustee acts for no one but the contract.

Parties to a trade or deal should be encouraged to ensure their interests are properly protected by any contract they sign. Most disputes occur because the parties failed to ensure the contract reflected their intentions and protected them against unforeseen issues.

Brokers are responsible for trust fund disbursements

Brokers are responsible to ensure that trust funds are disbursed in accordance with the terms of trust.  Brokers may delegate this duty to associates or associate brokers registered with the brokerage provided that the delegation meets the requirements of sections 52 and 68 of the Rules made pursuant to the Real Estate Act. Brokers should require the brokerage’s associates to report any issues associated with the disbursement of trust funds immediately.

While brokers are encouraged to seek information and assistance from their associates, brokers should not let the associates dictate the process for determining the disbursement of the trust funds.

Should RECA receive a complaint regarding a trust disbursement, RECA will only consider the conduct of the broker and his or her delegate as it relates to the disbursement of the trust funds.

Determining entitlement in accordance with the terms of trust

In order for brokers acting as trustees to ensure they disburse trust funds in accordance with the terms of trust, they should:

1. Review and understand the terms of trust.
2. Determine and obtain the information required to make a determination under the terms of trust. For example, if the terms of trust relate to purchase financing, the real estate broker will need to determine whether the buyer sought financing and the outcome of the application process.
3. Review the information. A mortgage broker may want to determine whether the lender provided a written commitment before the borrower backed out of the deal.
4. Make supporting inquiries if the information is unclear.
5. Have the parties to the trade or deal make submissions regarding the terms of trust if the determination is difficult.
6. Obtain legal advice from a lawyer if the broker is still unsure how to proceed. When pursuing this option, RECA recommends, along with the terms of trust and all relevant information, that the lawyer be provided with a copy of this article to ensure that he or she understands the responsibilities that the broker acting as a trustee has under the Real Estate Act and the Trustee Act.

Even if the circumstances appear to be straightforward, RECA still recommends that independent legal counsel confirm for the parties who is entitled to a disputed deposit.

When no reasonable conclusion can be made

Brokers acting as trustees will find that there will be situations where no reasonable conclusion can be made. In these situations, brokers have the following options:

1. Brokers acting as trustees may exercise dispute resolution options contained in the terms of trust. For example, the Alberta Real Estate Association’s (AREA) standard residential purchase contract contains the following clause: If no reasonable conclusion can be made in regard to #1 above, the brokerage shall notify the parties to the purchase contract in writing and pay the money into a lawyer’s trust account.
2. Negotiate the terms of trust dealing with the process of determining entitlement with all parties to the trade or deal. For example, the parties may agree to have the brokerage or another person hold the funds in trust until the matter can be litigated through the courts.
3. Make an application to the courts requesting the brokerage be relieved of their trustee responsibility. See section 40 of the Trustee Act for more information.
4. Consult a master in chambers in accordance with section 43 of the Trustee Act.

Brokers acting as trustees must note that the buyer and the seller must be kept advised of what is happening with the disputed funds.

Documenting the disbursement process

Brokers acting as trustees must document the process and information considered when determining entitlement. Brokers acting as trustees are governed specifically by the terms of the trust, and must be able to support any actions they take in accordance with those terms on a factual basis.

Not disbursing the trust funds to their lawful owner

The effect on the public of not dealing with trust funds quickly and properly can be significant. A seller may be entitled to a deposit and really need it. For example, he or she may end up with two homes if the buyer has defaulted on the seller’s home but the seller has already purchased a new home. Likewise, a buyer who is entitled to the return of a disputed deposit from a non-completed sale may not be able to come up with other funds to put down as a deposit on the purchase of another property.

Failing to disburse the trust funds in accordance with the terms of trust where a reasonable conclusion can be made is in essence a form of misappropriating the trust funds from its lawful owner.

Just as conveyancing of property relies on the lawyers for the transaction acting in trust, the public must trust that their deposits may be made without fear of loss. All industry members have a vested interest in ensuring that their actions relating to trust funds are objective, appropriate and transparent.

Acting in a diligent manner

Brokers acting as trustees must diligently follow the process to disburse trust funds in accordance with the terms of trust. RECA understands that due process takes time and that there will be delays in obtaining the information necessary to make a determination under the terms of trust. However, brokers acting as trustees should not be idle or hold a deposit in trust without letting the parties to the trade attempt to resolve the issue. Failure to take reasonable steps to disburse trust funds in accordance with the terms of trust may be considered conduct deserving of sanction.

Brokers acting as trustees must make reasonable efforts to disburse trust funds in accordance with the terms of trust.  Brokers acting as trustees must not pay the money into court or to a lawyers trust account when a reasonable determination can be made.

Courts have been known to assess substantial damages against industry members who abuse trust dispute resolution options.

Disputes relating to the brokerage’s entitlement

Brokers acting as trustees sometimes need to decide whether they are entitled to receive remuneration from funds held in trust. These situations may relate to service agreement cancellations (i.e. a property management agreement) when improper notice is given or deposits are forfeited and a portion of the deposit is to be used as commissions. Brokers acting as trustees are advised to carefully consider the circumstances and to take proactive steps to discuss and explain the disbursement if any difficulties are anticipated.

Reasonable conduct

RECA recognizes that acting as a trustee can be difficult and fraught with controversy. RECA does not consider it conduct deserving of sanction when a broker, acting as a trustee, follows these guidelines and performs due diligence in making a reasonable decision, even if the courts ultimately do not agree with the broker’s decision.

Brokers should also be aware that the Trustee Act can provide protection for trustees that acted honestly and reasonably. For more information, see section 41 of the Trustee Act. The Trustee Act can be viewed in its entirety here.

Obtaining disbursement consent

Written consent from the parties to the transaction will assist a brokerage should legal liability issues arise. While brokerages may request consent from the parties to the trade or deal, brokerages should not demand written consents as this would constitute adding a condition on the written terms of trust.

 

 

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