BROKER RISK MANAGEMENT - WEEKLY PRACTICE TIP

 

 BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

 

Escrow Cancellation Fees

Q: I am a buyer’s agent on a transaction that we tried to close for several months, but were delayed because of several liens against the seller, including an IRS tax lien. The time for close of escrow was initially extended for 30 days, followed by another 30-day extension. At the end of that second extension, my buyer was frustrated and cancelled the contract.  Both seller and buyer signed escrow instructions to return the $5,000 deposit to my buyer; there was no dispute between them. However, the escrow company stated that they were deducting a $600.00 “cancellation fee” from buyer’s deposit funds. Can they do that?

 

A: Basically, yes they can. According to a new law that was effective January 1, 2008, a Department of Corporations-licensed escrow company (as opposed to a broker-controlled escrow) may charge a fee for cancellation, or postponement, of the escrow resulting from actions or omissions of the parties to the escrow transaction.  According to Finance Code Section 17421.5, which embodies this new law, in order to be enforceable, this fee must have been disclosed in 8-point type on the first page of the escrow instructions and the provision must have been separately initialed by the parties.

This has become a particularly contentious issue in the short sale arena where there are a high percentage of cancelled escrows. On one hand, escrow companies feel that they are doing a lot of work on a transaction only to have it cancel, and they are not compensated for their good work. On the other hand, there are buyers who do not like to pay a fee for a cancelled transaction.

 

PRACTICE TIPS

1. If an escrow company tries to collect a cancellation fee: (1) check to see if the buyer and seller have been advised in writing of the escrow company’s policy of collecting a cancellation fee; (2) that the notice was on the front page of the escrow instructions, and (3) that the provision was separately initialed by both seller and buyer. If all of these requirements have not been met, the escrow company is not entitled to charge a cancellation fee.

 

2. If you are concerned about these fees in the future – as there are a fair number of cancellations in this uncertain market, and especially where there are so many short sales -- check with the escrow company about their cancellation fee policy prior to designating that escrow company for your transaction.

 

3. If your client feels that an escrow cancellation fee was unjustly charged, they can seek recovery of that money in Small Claims Court. Sometimes, just the threat of going to Small Claims Court may result in the escrow company releasing the funds.

 

 

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Copyright© Broker Risk Management 2009 10/2/09