By Miriam J. Beer, Assistant Legal Counsel
Getting paid is, of course, a matter of primary importance to most persons, and real estate agents are no exception. In the past, it has been customary for closing attorneys to pay real estate agents their commissions at the closing meeting. But changing requirements of lenders and recent opinions of the North Carolina State Bar (the agency which regulates attorneys) make it clear that, in many instances, such a practice is no longer acceptable. Attorneys now may be bound by the law and/or their agreements with lenders to update their title searches and to record certain documents prior to disbursing loan proceeds.
In typical residential loan closings, the attorney searches the title of the subject property and issues a preliminary title opinion. Based upon this preliminary opinion, the title insurance company determines whether or not it will insure the title. Generally, the lender will not allow title to transfer and the title company win not agree to insure the property until all deeds of trust and other liens against the property are paid off.
At closing, the attorney collects the money from the buyer and the lender and has the parties sign an closing documents. However, the lender's closing instructions typically prohibit closing attorneys from disbursing any funds (e g., to pay off the existing deed of trust, any lien-holders, the seller, or the real estate agent) until they have again reviewed the public record to assure that nothing affecting title has occurred since their initial title search. After updating the title status and determining that nothing has been placed in the public record which would call the title into question, the attorney then immediately records the new deed and deed of trust, and issues a final title opinion certifying that the new lender's deed of trust is first in line for repayment. At approximately the same time, the attorney pays off the prior lender and any other lien holders and cancels their deeds of trust and liens on the record.
Because lenders, the State Bar and title insurance companies are now insisting that an updated title search and recordation be accomplished prior to the disbursement of funds, real estate agents may experience a brief delay in getting paid. Since attorneys must return to the register of deeds office to check the records and record the deeds and deeds of trust first, they may not be able to disburse commission checks until the day after the closing or even later, depending on the time of day of closing, the distance to the register of deeds of lice, and the day of the week on which closing occurs.
An additional impediment to immediate payment may result from the type of funds brought to closing to pay the seller, existing lien-holders and other closing costs. Normally, closing attorneys receive checks from the buyer, the lender and, in some cases, the real estate agent, and deposit them into their trust accounts. They then write checks from their trust accounts to pay all the outstanding debts connected with the transfer (property survey, termite report, seller's loan payoff, attorney's fees, etc.). But if the checks from the buyer, lender and/or agent are not certified, then the closing attorney's bank may place a "hold" on the funds for as long as ten days. When that happens, closing attorneys must wait for those checks to clear (or for the "hold" to be lifted) before they can make any payments from their trust accounts. The reason for this delay is obvious: If an attorney writes
trust account checks from the buyer's funds and the buyer's check is later returned for insufficient funds, then the attorney has engaged in deficit spending. The attorney's trust account is now short the amount of the buyer's "bounced" check and the attorney has, in fact, spent trust funds belonging to others. Or even worse, if there are not enough other funds in the attorney's account to cover the "bounced check," then the attorney's trust account check will also bounce!
Some attorneys have attempted to solve the problem by giving commission checks to real estate agents but asking them not to cash the check until all closing documents have been recorded and/or all incoming checks have cleared. However, the North Carolina State Bar has issued an opinion indicating that attorneys who follow such a course of conduct are violating the ethical requirements of the Bar. The State Bar writes
...by delivering to the real estate agent checks drawn on the trust account when the account has either (i) no funds or (ii) trust funds belonging to others, the Attorney violates Rules 10.1 and 10.2 [the attorney's equivalent to the trust account rules]. Under those rules, funds deposited in a trust account are funds received by the Attorney as a fiduciary, which must be held and disbursed only for the benefit of those entitled to them, in accordance with appropriate instructions. Accordingly, Attorney cannot violate or delegate his fiduciary duty by putting into the hands of an unrelated third-party a check, regular on its face, drawn on a trust account containing only the funds of others. Similarly, Attorney cannot ethically deliver checks drawn on an account with insufficient funds, in violation of the law and the implicit requirements imposed by Rule 10.2(F).
In other cases, attorneys sometimes allow real estate agents to write trust account checks on their purchaser's earnest money deposit directly to themselves and to cooperating real estate agencies for their portion of the commissions. But again, because of the attorney's need to update the title search and record instruments prior to disbursement, the agent may be asked to wait to disburse any funds from the transaction which are in his or her trust account until the final title update and recordation have been accomplished.
These requirements are not designed to harass agents or delay their commissions. They are simply unfortunate side-effects of the legal requirements imposed upon closing attorneys— legal requirements with a purpose: If the title update reveals any new defects, then the transaction may fail. The buyers would then be entitled to the return of their earnest money deposit. But this would be difficult to accomplish if those funds have already been paid to various real estate agents involved in the transaction.
For these reasons, real estate agents must exercise patience with regard to their receipt and payment of commissions. Agents who insist that closing attorneys violate their legal obligations by paying commissions at closing may be disciplined for engaging in unworthy or improper conduct under the Real Estate License Law.