AAR reviewed a new regulation recently proposed and published by the Alabama Real Estate Commission (AREC). AAR submitted a comment letter providing feedback and requesting additional consideration on the proposed rule change.

The letter can be found below. 

Dear Vaughn and Members of the Alabama Real Estate Commission:

On behalf of Alabama REALTORS® (“AAR”), we appreciate the Alabama Real Estate Commission’s (“AREC” or the “Commission”) efforts to address the longstanding challenges surrounding disputed and dormant earnest money and for the opportunity to comment on the proposed amendment to Rule 790-X-3-.03.

AAR agrees that the existing framework warrants review. When a transaction fails and the parties cannot be located, refuse to cooperate, or simply take no action, earnest money funds may remain in a trust account for years without a clear mechanism for resolution. This creates accounting issues, complicates trust-account management for qualifying brokers and licensed companies, and leaves both buyers and sellers without finality.

We support the Commission’s objective of creating greater clarity, consistency, and finality. Our concerns are not directed at the need for reform. Rather, after reviewing the proposed language and hearing significant concerns from brokers and licensees across the state, we believe the current proposal creates substantial legal, practical, and procedural problems.

Our central concern is straightforward: the rule should establish a neutral procedure for resolving disputed and dormant earnest money, not create a presumption that one party is entitled to disputed earnest money funds.

The proposed rule would require a qualifying broker to disburse earnest money to an individual buyer 90 days after the contractual closing date when a transaction terminates without consummation, unless the parties reach a specified agreement, a court orders otherwise, or the seller files a civil action pertaining to the earnest money. The same general framework would apply retroactively to contracts that were entered into more than one year ago.

In our view, that approach unnecessarily favors one consumer over another, and places brokers in the position of resolving legal disputes that should be decided by the parties or a court. We believe that this rule amendment, if approved as is, may likely face legal challenges and could ultimately be struck down by the courts. We respectfully ask the Commission to table or withdraw the current proposal and continue working with stakeholders on a more balanced solution. There should be no rush to adopt a rule simply to meet a perceived deadline. It is far more prudent to take the time necessary to ensure the Commission gets this policy right before it is adopted and potentially implemented.

I. Legal Concerns

A. The Proposed Rule May Exceed the Commission’s Statutory Authority

The Commission has broad authority to regulate real estate licensees and the manner in which funds belonging to others are safeguarded, accounted for, and remitted. See Ala. Code §§ 34-27-8 and 34-27-36 (1975). The proposed amendment arguably goes beyond regulating the broker’s handling of earnest money. It establishes that, after a prescribed period, the broker “shall disburse to the buyer” disputed earnest money unless the seller takes one of several specified actions.

That distinction is important. The current rule generally treats the qualifying broker as a neutral stakeholder. When the parties dispute entitlement to earnest money, the broker does not determine who should prevail. Instead, the earnest money funds are held pending a written agreement or court order. The proposed rule, by contrast, creates a regulatory default governing which contracting party receives the disputed earnest money.

Alabama courts have repeatedly recognized that an administrative rule must remain within the authority delegated by the Legislature and may not “subvert or enlarge upon statutory policy.” Ex parte Jones Mfg. Co., 589 So. 2d 208, 210 (Ala. 1991); Ex parte City of Florence, 417 So.2d 191 (Ala. 1982); Alabama State Milk Control Bd. V. Graham, 33 So.2d 11 (1947); Jefferson County Bd. Of Ed. V. Alabama Bd. Of Cosmetology, 380 So.2d 913 (Ala. Civ. App. 1980). The Alabama Administrative Procedure Act likewise authorizes invalidation of a rule that exceeds an agency’s statutory authority. See Ala. Code § 41-22-10.

The Commission may regulate its licensees. It is less clear that the Legislature has authorized the Commission to establish, by regulatory presumption, the terms of legally binding contracts and the substantive entitlement of a buyer or seller to disputed earnest money. A neutral procedural rule governing notice, objection, and disposition of earnest money would accomplish the Commission’s objective without creating this significant legal question.

B. Retroactive Application Raises Federal and Alabama Contracts Clause Concerns

AAR recommends removing the provision that applies the new rule to purchase agreements executed before its effective date.

Article I, Section 10 of the United States Constitution provides that no State shall pass a law “impairing the Obligation of Contracts.” U.S. Const. art. I, § 10, cl. 1. Section 95 of the Alabama Constitution similarly prohibits laws impairing the obligation of contracts. These constitutional provisions do not prohibit all regulation affecting contractual relationships. Nevertheless, applying a newly created mandatory disbursement rule to existing agreements raises a serious concern where the parties contracted under a different legal and regulatory framework.

Existing purchase agreements may contain earnest-money remedies, liquidated-damages provisions, contingencies, cure rights, mediation requirements, arbitration provisions, or other negotiated procedures governing entitlement to disputed earnest money. Parties to those agreements may also have relied on the existing rule’s requirement that disputed earnest money remains in escrow absent a post-termination agreement or court order.

The proposed amendment would impose a new mandatory disbursement requirement on contracts that were already formed, potentially requiring a broker to act contrary to the parties’ written agreement regarding disputed earnest money by disbursing the disputed funds to one party over the other. The fact that a seller may still later file a civil action does not fully preserve the parties’ existing contractual position. Once the earnest money has been disbursed to the buyer, even a prevailing seller may face the additional burden of collecting the earnest money funds and lose the practical security of having the earnest money held by a neutral stakeholder.

The Commission can avoid this constitutional and reliance concern by applying any new procedure prospectively to contracts executed after the rule’s effective date. The Commission cannot redefine the terms or conditions of contracts that have been negotiated at arm’s length and entered into prior to the effective date of this potential rule amendment.

C. The Proposed Rule Requires Brokers to Make Contested Legal Determinations

The proposed language places qualifying brokers in an unsustainable position. The proposed rule effectively asks brokers to practice law without a law license, which violates state law. See Ala. Code § 34-3-6(b)(4) (1975). If the proposed rule goes into effect, a broker may be required to determine:

• whether a transaction has “terminated without consummation”;
• which contractual closing date controls;
• whether an extension or amendment is effective;
• whether a contingency, cure period, or other contractual right remains outstanding;
• whether a buyer is an individual or business entity;
• whether a post-termination agreement complies with the rule;
• whether a lawsuit sufficiently “pertains to” the earnest money; and
• whether notice of that litigation is legally sufficient.

These are often disputed questions of contract interpretation and law. A missed closing date, for example, does not necessarily mean the contract has terminated. The parties may continue performance, exercise an extension, dispute a termination notice, or disagree regarding satisfaction of a contractual contingency.

The proposed rule nevertheless requires the broker to act unilaterally and disburse the disputed earnest money funds within seven days once the broker determines the rule’s conditions have been satisfied. On one hand, the broker may face Commission exposure for failing to disburse disputed earnest money funds, and on the other hand, the broker may face civil lawsuit exposure from a seller who contends the earnest money funds were wrongfully released by the broker. This puts the broker in a difficult situation. The proposed rule provides no express safe harbor for a broker acting reasonably and in good faith to comply with AREC’s proposed requirement.

The Commission should preserve the broker’s role as a neutral stakeholder rather than place licensees in the position of adjudicating disputed contract rights or practicing law without a law license.

D. The Proposed Rule Conflicts with the Existing Interpleader Framework

Interpleader is a long-established procedural mechanism specifically designed for a stakeholder facing competing claims to a single fund. Rather than requiring the stakeholder to determine entitlement, interpleader allows the court to resolve the competing claims while protecting the stakeholder from conflicting obligations.

In Alabama, generally applicable interpleader practice is governed by Rule 22 of the Alabama Rules of Civil Procedure. The Commission’s current Rule 790-X-3-.03(5)(b) expressly recognizes a broker’s ability to deposit disputed earnest money funds with an appropriate court under the rules of interpleader or other lawful procedure. The proposed amendment creates tension with that provision.

Paragraph (5)(b) states that the broker “shall disburse to the buyer” unless one of three exceptions applies.  Alabama Real Est. Comm’n, Proposed Amended Rule 790-X-3-.03(5)(b), Notice of Intended Action (filed May 12, 2026). A broker’s commencement of an interpleader action is not expressly included among those exceptions. Id. The proposed rule instead places the burden on the seller (the party who does not possess the earnest money funds) to file a civil action. Id.

That structure is procedurally inefficient because it separates the party seeking recovery of the earnest money funds from the party holding the earnest money funds. A seller may file a civil action against the buyer, but the earnest money remains in possession of the broker or qualifying company. As a result, the broker or qualifying company may still need to seek judicial guidance through an interpleader action, creating the potential for additional litigation, delay, and expense before the dispute is resolved.

A neutral interpleader procedure allows competing claims to the same earnest money funds to be resolved in one forum and avoids requiring the broker to determine which party is entitled to the earnest money funds. Any amendment should expressly preserve Rule 22 interpleader and provide that a broker’s lawful deposit of disputed earnest money funds with the court satisfies the broker’s obligations under the rule. Any amendment should also clarify that costs associated with an interpleader proceeding may be addressed by the court in its order directing disposition of the earnest money funds, rather than requiring the broker or qualifying company to bear those costs when acting as a neutral stakeholder. 

II. Practical Real Estate Concerns

A. The 90-Day Presumption May Reward Inaction and Discourage Resolution

The proposed rule creates materially different incentives for buyers and sellers. The rule assumes good conduct by the buyer and no breach in terms of the contract.  A buyer claiming the earnest money may have little reason to execute a mutual release or negotiate a resolution because the buyer may simply wait for the 90-day period to expire. The seller, by contrast, must file a civil action to prevent automatic disbursement.

This concern is particularly significant where the earnest money at issue is less than the anticipated cost of litigation. Even where a seller has a legitimate contractual claim arising from buyer default, filing fees and attorneys’ fees may make litigation economically impractical. The proposed rule may therefore create the very stalemate it seeks to eliminate - one party is rewarded for waiting, bad conduct, or breaching the terms of the contract, while the other must incur substantial expense to preserve the status quo.

Moreover, the rule also applies without regard to why the transaction failed. The same presumption applies when a seller defaults, a contingency fails, or a buyer allegedly commits a clear contractual breach. A uniform presumption favoring disbursement to the buyer does not account for the varied contractual circumstances that may give rise to an earnest money dispute.

Further, the rule also requires a broker to potentially ignore the terms of a contract. From a policy standpoint, brokers have collectively been asked to put things in writing to be sure the terms of agreements between parties, between brokers, and between consumers are clear. This rule seems to promote the opposite of that and encourages brokers to disregard or break the terms of the contract.

A neutral demand-and-objection procedure would place an equal duty to act on both parties. Silence could permit disbursement, but a timely bona fide objection would identify an actual dispute and direct the matter toward an appropriate resolution process.

B. Requiring a Civil Action May Increase Unnecessary Litigation

The seller’s primary unilateral means of stopping disbursement under the proposal is filing a civil action.

A demand letter is apparently insufficient. A written notice of dispute is insufficient. Mediation may be insufficient. An arbitration demand may be insufficient. Even active settlement negotiations may be insufficient absent the specific agreement required by the rule. The result may be a practical “file suit or lose the escrow” deadline.

Risk-averse sellers and their attorneys may reasonably conclude that litigation must be filed simply to preserve the disputed earnest money funds. That result increases legal costs and court filings and may undermine contractual mediation, arbitration, or other dispute resolution procedures designed to avoid litigation. Rather than making a civil action the only meaningful unilateral protection available to a seller, the rule should recognize timely written objections and formal contractual dispute-resolution proceedings.

C. The Proposed Rule May Encourage Parties to Avoid Licensed Companies as Escrow Holders

The proposed rule applies when earnest money is held by a licensed real estate company. It does not (and may not) impose the same disposition procedure on attorneys, title companies, or other non-licensee escrow holders.

Parties who do not want the proposed buyer-disbursement presumption may therefore structure transactions so that a licensed real estate company does not hold the earnest money. By increasing red tape and regulations, the Commission may inadvertently discourage consumers considering selling their property from using a licensed real estate salesperson or broker.

This would be a counterproductive outcome. Licensed companies are subject to Commission oversight and detailed trust-account requirements. A consumer-protection rule should not unintentionally create an incentive to move earnest money funds away from Commission-regulated holders. A neutral procedural safe harbor for licensees is less likely to distort the parties’ selection of an escrow holder.

D. The Rule Does Not Address Common Operational Problems

The proposal leaves several significant practical questions unanswered. It does not clearly address situations involving a buyer or seller who is deceased, incapacitated, unresponsive, or cannot be located. This is particularly problematic for earnest money funds which have remained in trust for years. Brokers may only have outdated mailing addresses, telephone numbers, or email addresses. A party may have changed names, an estate may not have been opened, or a disbursement check may have been returned or remain uncashed.

The rule also does not specify:

• how notice of a filed civil action must be delivered;
• what constitutes timely receipt;
• what documentation the broker must obtain;
• whether seven days means calendar or business days;
• how brokers should document compliance; or
• how a broker should proceed when relevant amendments or extensions were never delivered to the escrow holder.

These unanswered questions increase inconsistency and liability rather than creating clarity. Any new amendment to the rule should permit a qualifying broker to rely in good faith on the transaction documents, notices, and contact information contained in the broker’s records. Brokers acting in good faith and substantially complying with the prescribed procedure should receive an express regulatory safe harbor. 

III. Procedural and Policy Concerns

A. Dormant Property and Actively Disputed Property Should Be Treated Differently

The proposed rule appears to address and lump together two distinct problems:

1. earnest money funds subject to an active dispute between buyer and seller; and
2. dormant or effectively abandoned earnest money funds where the parties cannot be located or no one takes action for an extended period.

These circumstances should not be treated as the same problem. Alabama already has a statutory framework addressing dormant property. Ala. Code § 35-12-72(a)(19) (1975), provides a three-year dormancy period for “[a]ll other property” after the owner’s right to demand the property or the obligation to pay or distribute the property arises, whichever occurs first. The Legislature has therefore already established a three-year benchmark for otherwise unspecified property presumed abandoned.

A recently failed transaction involving two parties actively disputing contractual entitlement is fundamentally different from earnest money funds that have remained untouched for years because no apparent owner can be located or no person continues to express an interest.

AAR recommends separating these two issues. Genuinely, disputed earnest money funds should be addressed through a neutral notice, objection, and interpleader procedure. Whereas earnest money funds that have become dormant or unclaimed should be handled consistently with Alabama’s existing unclaimed-property statutes, including applicable reporting, due-diligence, and remittance requirements. This distinction would use the statutory framework already enacted by the Legislature for unclaimed property rather than creating a competing 90-day presumption of entitlement.

For genuinely disputed earnest money funds, the appropriate process is one that preserves the rights of both parties while allowing the broker to remain a neutral stakeholder. A notice-and-objection procedure would provide each party an opportunity to assert a claim to the earnest money funds and identify whether a legitimate dispute exists. If the dispute cannot be resolved, the broker should be permitted to utilize an interpleader procedure to deposit the earnest money funds with the court and obtain direction regarding their proper disposition.

For earnest money funds that have become dormant or unclaimed, the existing unclaimed-property framework already provides a process for handling those earnest money funds. Under Alabama’s unclaimed-property statutes, property that remains unclaimed for the applicable dormancy period (three years for “[a]ll other property” under Ala. Code § 35-12-72(a)(19) (1975)) is subject to reporting and remittance requirements. Once reported and remitted, the property remains available for the owner or other claimant to recover through the State’s established claim process. Applying this framework to dormant earnest money funds would preserve the Legislature’s established approach while avoiding the creation of a separate presumption that disputed earnest money funds belong to one party merely because a shorter period of time elapsed.

B. The Commission Should Reconsider the Finding of “No Economic Impact”

The proposed rule’s transmittal sheet states that the amendment has no economic impact and does not directly or indirectly increase costs.AAR respectfully requests that the Commission reconsider that determination.

The amendment will require significant operational changes, including revisions to purchase agreements, updates to electronic forms and document-management platforms, new trust-account tracking procedures, broker and licensee education, and increased legal expenses associated with interpreting and advising on disputed deadlines and disbursement obligations. More significantly, the requirement that sellers file civil actions to preserve disputed earnest money will create direct litigation costs.

These observations do not necessarily mean the costs outweigh the benefits of reform. They do suggest that the proposed rule has an economic impact that should be fully considered under Ala. Code § 41-22-23 (1975) and other applicable requirements of the Alabama Administrative Procedure Act.

The Commission should also allow a reasonable implementation period after final language is adopted. Purchase agreements used across Alabama are maintained by individual brokerage companies, state and local REALTOR® associations, attorneys, and other organizations. Forms must be legally reviewed, drafted, formally approved in many companies and organizations, updated on electronic transaction management platforms, and distributed to users. Licensees must then be educated regarding a substantial change in trust-account practice. A measured implementation period will improve compliance and reduce consumer confusion.

IV. A Constructive Alternative: Notice, Objection, and Interpleader

AAR respectfully encourages the Commission to continue pursuing the important policy objective underlying this amendment, but through a neutral procedure.We recommend a framework with the following elements:

• Prospective application: The procedure should apply only to purchase agreements executed after the effective date.
• Utilization of Legal Forms Drafted by an Attorney Licensed in Alabama:The Commission should require use of legal forms drafted by an attorney licensed in Alabama that incorporates clear and timely dispute-resolution procedures for disputed earnest money funds.
• Demand: Either the buyer or seller may submit a written demand for all or a portion of the earnest money after the transaction terminates, provided the demand is consistent with the terms of the purchase agreement. The demand process should preserve the parties’ contractual rights and should not alter the obligations or remedies established by the agreement.
• Notice: The qualifying broker should send the demand and a Commission-prescribed notice to the other party using the physical and electronic contact information contained in the broker’s transaction records.
• Objection period: The non-demanding party should have a defined period to submit a written objection identifying the amount disputed and briefly stating the basis of the claim.
• No objection: If no timely objection is received, the broker may disburse the earnest money funds according to the demand.
• Timely objection: If competing claims are timely asserted, the qualifying broker remains neutral. The disputed earnest money funds should be held for a short, defined period to permit a written agreement or completion of a contractually required mediation, arbitration, or other dispute-resolution procedure.
• Interpleader: If the dispute remains unresolved during the three-year period before the earnest money funds become subject to Alabama’s unclaimed-property procedures, the broker should be authorized to deposit the disputed earnest money funds with an appropriate court under Rule 22 of the Alabama Rules of Civil Procedure or another lawful procedure. The Commission may wish to consider whether interpleader should become mandatory after a defined period for qualifying amounts.
• Undisputed funds: Any portion of the earnest money funds that the parties agree is undisputed should be promptly released.
• Broker safe harbor: A qualifying broker should be permitted to rely on the documents, notices, and contact information contained in the broker’s records and should receive a regulatory safe harbor for good-faith material compliance with the rule.
• Dormant funds: Earnest money funds that meet the applicable statutory dormancy requirements (three years for “[a]ll other property” under Ala. Code § 35-12-72(a)(19) (1975)) should be handled under Alabama’s unclaimed-property laws rather than retained indefinitely in a broker’s  trust account. After three years, licensees should be required to remit such funds to the State Treasurer’s Office consistent with Alabama’s unclaimed-property procedures. Depending on the circumstances, the funds may be reported in the name of the buyer, the seller, or both parties as potential claimants. Requiring remittance after the dormancy period would provide a clear resolution for long-held funds and avoid creating any incentive for funds to remain indefinitely in a broker’s trust account rather than being transferred to the State’s established unclaimed-property process.

This framework directly addresses the problem identified by the Commission. It requires inactive parties to act; permits disbursement without litigation where no genuine dispute exists; prevents either buyer or seller from using silence to maintain an indefinite hold; preserves the qualifying broker’s neutral role when competing claims are asserted; and it directs genuine disputes to the procedural mechanism designed to resolve competing claims to a single fund.

Conclusion

AAR appreciates the Commission for identifying a legitimate problem and beginning an important conversation about the future treatment of disputed and dormant earnest money funds. We agree that the current framework can leave qualifying brokers, licensed companies, buyers, and sellers in limbo for too long and that a solution is needed.

However, we respectfully believe that the proposed automatic return of disputed earnest money funds to the buyer after 90 days creates unnecessary legal uncertainty, places qualifying brokers in the position of making disputed legal determinations, alters the incentives of buyers and sellers, and may increase litigation and costs. The Commission’s goal can be achieved without creating a substantive presumption in favor of either party.

For these reasons, AAR respectfully requests that the Commission table or withdraw the current proposal and continue working with stakeholders on a prospective notice, objection, and interpleader framework that treats buyers and sellers fairly, preserves broker neutrality, and coordinates with Alabama’s existing unclaimed-property laws.

Great policy takes time to develop and there is no harm in allowing additional time to ensure that a change of this significance is clear, legally sound, and workable in real-world transactions. The consequences of getting the framework wrong will be borne by consumers and licensees across Alabama.

We appreciate the opportunity to provide comments and stand ready to work constructively with the Commission toward a solution. We may provide supplemental information to AREC’s legal team at a future date. Should you have any questions, require further clarification, or if we can be helpful, please do not hesitate to reach out.

Warm regards,                         

Jeremy Walker                                      Wes Grant

Chief Executive Officer                   Chair of AAR’s License Law Workgroup