The Deposit That Never Reached Trust
Priya is the managing broker of a small brokerage. On a $640,000 sale, the buyer's deposit is $30,000. The buyer's representative, Ken, asks the buyer to make the cheque payable to the seller, Ms. Alvarez, 'to speed things up.' Ken deposits the cheque into the brokerage's general operating account on March 3, intending to transfer it to trust 'next week.' On March 10, the brokerage pays its office rent of $4,200 and a $900 marketing invoice from that same operating account, which now holds the $30,000 plus $2,100 of the brokerage's own funds. The deal collapses on March 20 because financing fails. Ms. Alvarez demands the deposit back immediately. Priya discovers the account is short by $3,000 because of an unrelated bank charge and the rent payment.
1. Analyze the trust accounting and record-keeping failures and the regulatory exposure for Priya, Ken, and the brokerage.
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Multiple breaches arise here.
Payee and receipt into trust. A deposit must be held in the brokerage's trust account, not the seller's name and not the general account. Cheques for deposits should be made payable to the brokerage in trust (or to the brokerage as trustee) so the funds are identifiable. Ken's instruction to make it payable to Ms. Alvarez is improper.
Commingling. Depositing trust money into the general operating account is commingling, a serious breach. Trust money must be deposited into a designated trust account promptly (in practice, on the next banking day). Ken's 'next week' plan is a violation regardless of intent.
Misappropriation by use. Paying rent and a marketing invoice from an account containing trust funds means trust money was used for the brokerage's own expenses. Even if the brokerage's own $2,100 was in the account, the account is short $3,000, which means the trust beneficiary's money is missing. That is a trust shortfall and potentially misappropriation, the most serious category of trust violation.
Record keeping. Priya must maintain individual ledger cards for each transaction, a trust cash book, and reconciliations. A shortfall of $3,000 would have been caught by a monthly reconciliation. Records must be retained and available for audit.
Exposure. Ken faces discipline for commingling and failing to deposit promptly. Priya, as managing broker, is responsible for trust account supervision and cannot delegate that accountability away; she faces discipline for failing to supervise and for the shortfall itself. The brokerage may face suspension or licence conditions, and the shortfall must be restored from the brokerage's own funds immediately. The Real Estate Council can audit and impose penalties, and a criminal referral is possible where funds are misappropriated.
Immediate cure. Restore the $3,000 from the brokerage's own money today, reconcile the account, and report the shortfall to the regulator as required.
2. The deal collapsed. Explain who is entitled to the $30,000 and how Priya should handle the funds while the dispute is unresolved.
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The deposit is trust money and does not belong to the brokerage. On a failed deal, entitlement depends on the contract terms and the reason for failure.
Step 1: Read the contract. Most BC contracts of purchase and sale provide that if the buyer fails to complete for a reason not permitted by the contract, the deposit is forfeited to the seller; if the deal fails through no fault of the buyer (for example, a condition that was not waived, or seller default), the deposit is returned to the buyer. Here financing failed and the deal collapsed on March 20. If the financing condition was still open, the buyer is likely entitled to return of the deposit. If the condition had already been waived, the seller may have a claim to forfeiture.
Step 2: Do not pay either party unilaterally. Where entitlement is disputed, Priya must hold the funds in trust and not release them to either side without a written release signed by both parties, a court order, or a regulator's direction. Paying the seller 'because the buyer defaulted' without a proper basis exposes the brokerage to a claim.
Step 3: Restore the shortfall first. The missing $3,000 must be replaced from brokerage funds so the full $30,000 is in trust. The buyer's entitlement is to $30,000, not $27,000.
Step 4: Document and communicate. Send both parties a written statement of the funds held, the competing claims, and the release process. Set a deadline, and if no agreement is reached, advise that the brokerage will apply to court for interpleader or follow the regulator's dispute procedure.
Priya should also notify her insurer and the regulator of the shortfall, since a trust shortage is a reportable event.