One of our earliest childhood understandings of trust is almost certainly the trust fall. You turn your back on the person you are supposed to trust and fall backwards into their waiting arms. Unfortunately, you quickly discover that not everyone can be trusted using this method, especially older siblings. I mention this childhood game to highlight the concept of trust, where you place your interests into the hands of another, relying on them to protect those interests. Let’s think this concept through concerning real estate trust deposits in Alberta.
In Alberta, the standard AREA purchase contracts all contain a section that anticipates the buyer’s delivery of a deposit. As I have explained in other articles, this deposit is good faith, or earnest money, indicating the buyer is serious about the transaction and willing to put up a sum of money to demonstrate that. When they deliver this deposit money, they wouldn’t feel secure to give it to the seller directly, so they give it to a trustee, normally the seller’s brokerage, to hold under certain terms. Those terms the trustee must follow are known as the terms of trust and must be agreed to by both the buyer and seller at the signing of the transaction.
So what requires using terms of trust, why not just a handshake and a smile like the good ol’ (albeit fictional) days? In Section 18 of the Real Estate Act, the legislation requires that when a brokerage agrees to accept trust money, they must have a written service agreement that “sets out the terms on which the money will be received, held and disbursed.” That means that the trustee brokerage must have the signed purchase contract in which the terms of the trust are established before accepting trust deposit money. Once they have the contract and receive the trust money, they obligate themselves to follow the established terms of trust exclusively.
That is a cringe-worthy statement, right? At least I have your attention now, and my point in making this statement is not to call into question a trustee’s intellect or make fun of the physical size of their brain but to point out in a memorable way that the trustee can only make decisions based on the terms of the trust. Since the terms of trust are established by the purchase contract between the buyer and the seller, and the trustee is chosen and agreed to by both parties, the terms of trust form the “programming” that the trustee must follow mechanically. The trustee can never do anything outside of the established terms of trust without the express written agreement of both parties to some new arrangement. The trustee is never at liberty to make their own decisions regarding trust money, and on the flip side, the trustee is not required to make judgment calls either or guess what the beneficial parties’ decision is since it is in writing and decided upfront.
As we all know, not all transactions come together, and some will collapse during the conditional period or sometimes even crater after conditions are removed. In such situations, the rubber truly meets the road for the trustee in following the terms of trust as mentioned previously. At this moment, a broker acting as the trustee must remove their broker hat, put on their trustee hat, and follow the terms of the trust without thought for the brokerage’s own interests. In the AREA purchase contracts, the trustee has clear instructions under what circumstances the trustee will disburse the funds, either to the seller or the buyer. In the vast majority of disbursement situations that present themselves in practice, the terms of the trust have already been anticipated, and the trustee in those noted situations is instructed to disburse, without prior notice, the funds as indicated. These clearly stated disbursement situations defined in the terms of trust can be made without seeking the parties consent or approval since they have already given their explcit instruction in the written terms of trust. Moreover, they gave those instructions to the trustee prior to any dispute in anticipation that those specific circumstances could potentially happen. Any stakeholder in the transaction who needs clarification about this fact can simply read the plain language of the terms of trust and recognize that the beneficial parties anticipated these specific circumstances and gave prior instruction to the trustee on how to manage them.
I have been around long enough to know that there are unique circumstances that don’t fall within the explicit instructions of the terms of trust. I would reassure folks that these unanticipated situations are extremely rare since the terms of trust in the standard contracts anticipate nearly all ordinary circumstances. I don’t mean situations where a party is mad about a disbursement despite it being clear; I mean situations where it is genuinely unclear whose fault the contract failure falls to. In those situations, since the terms of trust establish that the trust is held for the benefit of both parties, then both parties need to come to a written agreement on what to do with the trust money. Usually, this requires legal advice for the parties, and in such rare situations, the trustee can just sit on the deposit until the parties agree or a court orders something else.
The trust deposit system in real estate is a well established practice going back to the dawn of civilization, and it serves several good functions to the trade. The terms of trust being specified upfront, in writing, and by agreement of both parties prior to any dispute stands as a responsible way for trust money to be managed securely by the trustee and establishes confidence for the parties that interests will be dealt with fairly. Unlike the childhood trust fall, which often resulted in tears on one side and laughter on the other, the terms of trust form a well-established safety net for trust deposits.