The Deposit That Vanished
Northgate Realty in Halifax has a trust account at a local bank. A buyer, Ms. Okafor, gives her salesperson, Ben, a $25,000 deposit cheque for a house purchase. Ben deposits it into the brokerage's general operating account 'temporarily' because the trust account paperwork is still being set up. Three weeks later the deal collapses on a financing condition and Ms. Okafor asks for her deposit back. The brokerage's trust account is now open, but the $25,000 has been partly used to cover a $9,000 office lease payment and a $4,000 commission advance to another salesperson. The managing broker tells Ben to 'sort it out' and promises the money will be back 'within a couple of weeks.' Ms. Okafor is told to wait. She calls the registrar's office.
1. Identify the trust-account violations and explain how deposits must be handled under brokerage trust rules.
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Multiple serious violations occurred.
Wrong account. A buyer's deposit is trust money. It must be deposited into the brokerage's designated trust account, not the general operating account. 'Temporarily' is not a category the rules recognize; the deposit should have gone to trust immediately, and if the trust account was not yet open, the brokerage should not have accepted the cheque until it was.
Commingling. Using trust money to pay an office lease and to fund a commission advance is commingling - spending client funds on brokerage expenses. Trust money is held for the client and may be disbursed only for the purpose for which it was received (here, the purchase, or return to the buyer on a failed condition).
Shortfall. The trust account must at all times hold at least the amount owed to clients. Because $13,000 was spent, the brokerage is now short and cannot return the deposit on demand.
Records. Trust transactions must be recorded promptly and accurately, with a running balance and reconciliation. The 'couple of weeks' promise suggests no reconciliation is being done.
The managing broker is responsible for trust compliance and cannot delegate the problem to Ben with a vague promise.
2. Ms. Okafor's deal failed on financing. What is she entitled to, and what should Ben and the managing broker do now?
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Ms. Okafor's entitlement. The financing condition failed, so the contract did not become firm. Absent a term making the deposit non-refundable, she is entitled to the return of her $25,000 deposit. The brokerage holds it in trust for her and must return it promptly, not on the brokerage's convenience timeline.
What Ben should do. He cannot fix this alone. He should immediately escalate to the managing broker in writing, document the deposit date, amount, account it went into, and the disbursements, and stop making any further use of trust funds. He should not tell Ms. Okafor a date he cannot guarantee.
What the managing broker must do.
- Restore the trust account to the full amount owed, from brokerage funds, immediately - the shortfall is the brokerage's problem, not the client's.
- Return the $25,000 to Ms. Okafor without delay.
- Reconstruct records and reconcile the trust account.
- Report the matter as required; a trust shortfall is exactly the kind of event that triggers regulatory scrutiny and possible suspension.
- Review controls so deposits cannot be routed to operating accounts and so two people control trust disbursements.
The core lesson: client money is never working capital. The moment it is spent on the brokerage's own bills, the problem has moved from a paperwork error to a trust breach.