In a transaction in which the buyer is getting a mortgage, the closing attorney is representing the lender. If there is a dispute between the parties, the closing attorney, acting as Holder, has the same rights and duties of any other holder and holder may disburse the earnest money after 10-day letters and upon a reasonable interpretation of the Agreement.
It gets a bit more complicated when the transaction is all cash. In that event, there is no lender to represent, so the lender is representing either the buyer or the seller. If the transaction is written on GAR forms, the Purchase and Sale Agreement states that the closing attorney in an all-cash transaction represents the buyer.
Unlike Realtors®, who do not own fiduciary duties to clients, attorneys in Georgia do owe fiduciary duties to their clients. Therefore, attorneys must protect the best interest of their client and cannot act against their best interests. If there is a dispute, the closing attorney therefore has a potential conflict of interest. Per the GAR F510, Closing Attorney Acting as Holder of Earnest Money, the closing attorney’s only remedy is to interplead the funds into a court of competent jurisdiction. (GAR F510 p.8).
The cash buyer could default and the parties can’t come to an agreement regarding the earnest money. The closing attorney is blocked from disbursing funds to the seller because of fiduciary duty. So, the attorney must interplead the funds. Then the parties wait, pay the costs of filing and litigation, possibly lose the interpleader and then pay the other parties costs of litigation. A waste of both client funds and everybody’s time.
Here’s the takeaway.
If you want to avoid an interpleader in an all-cash transaction, consider NOT naming the closing attorney as the holder of earnest money. Your clients will thank you.
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