I once again had two fairly common issues come up this week. The first relates to escrow holdbacks. As you know, when an escrow is near close, and there is still some work to be completed, there are often competing interests. While the buyer wants all repairs to be done prior closing, they also don’t want to delay because any such delay includes a risk. As a result, the parties will often amend escrow, calling on the escrow holder to hold some money after closing and disburse it under certain specified conditions. It is this situation that I want to discuss.

First, while a holdback can often be a good way to move beyond a problem, it also carries significant risk. I recently spoke to an escrow attorney who told me that, with his clients, approximately 80% of holdbacks result in some kind of dispute between the parties. In one recent case, his client had been instructed to pay the held back money pursuant to “invoices,” only to have the parties argue about what an “invoice” was. While that kind of fight surely seems ridiculous, they still needed to spend time and fees dealing with it. Bottom line, the longer the parties continue to deal with each other, the greater the possibility that something goes wrong. As a result, when possible and before recommending a holdback, try a credit first. If a credit is issued, the deal is done, the escrow holder keeps no money, and no one needs to fight about the interpretation of a poorly drafted instruction.

If you have no choice but to do a holdback, on the other hand, there are a few things you can do to make the situation safer. First, involve your escrow officer. They have seen these clauses and can help you either avoid it or draft a safe instruction.
Further, always try to make your instruction simple and objective. “Money gets disbursed to party A on the occurrence of event x.” Do not ask escrow to use discretion or analyze any circumstance. That is not their job. Tell them what to do when specified objective criteria are met. Finally, always include a drop dead date and tell escrow explicitly where the money goes on that date. If you have any questions about this, contact your manager or me. We can help you draft the safest clause possible.

Next, I have received a lot of calls lately regarding situations where we have been asked by a buyer to represent them regarding a property that they have previously seen or discussed with another agent. In one case, the prior agent wrote an offer that was rejected and the buyer blamed them for that result. In another, the buyer had seen the property 4 times and communicated with the listing agent in numerous emails, but disputed that they ever agreed to be represented by that listing agent. The question in each case is whether we are safe to take on this representation or whether we are going to find ourselves fighting a procuring cause claim in the future.

The problem with answering that question, of course, is that we don’t control what type of claim another broker may make. Even if their claim was incredibly weak, they can still file it and we have to deal with it. Further, no matter the facts, I can never guarantee what an arbitration board will do. While we win the vast majority of our arbitrations, there are arbitrators that just don’t understand the case and can rule in the wrong way. With that in mind, how do we recommend that you deal with these situations?

The first thing to do is make sure that the client communicates their decision to change brokers. We never want to be accused of interfering with someone else’s agency and therefore want the client talking to the previous agent. After that happens, call the prior broker and try to negotiate a referral fee. If you are able to do that, the problem is solved and you know what you are going to earn. It cannot be taken away from you. On the other hand, if you ignore this problem and close escrow, you may end up on the bad side of a procuring cause claim and keep nothing. And that, of course, is never something we want you to do.

As always, please contact me with any questions you may have. Sam