Southampton - When a buyer and seller reach an agreement on a sale of real estate, it is customary for the seller's attorney to require that the buyer place in escrow with the seller's attorney upon signing of the purchase contract a sum equal to 10 percent of the purchase price. This sum is then a credit to the buyer who at closing pays the difference between the purchase price and the amount of the deposit.

Have you ever wondered what happens to any interest that may accrue on that deposit? The answer is it depends on at least two factors - the amount of deposit and the type of account into which the funds are deposited.

If these funds are large amounts, which they commonly are, given the prices of properties on the East End of Long Island, particularly the Hamptons, the funds are usually deposited in certificates of deposit or interest bearing accounts, and the interest belongs to the client. On transfers of real property of typically lesser amounts held in escrow over relatively short periods of time therefore generating little or no interest, New York Law provides an alternative.

In 1983 the New York State Legislature created the New York State Interest on Lawyer's Account Fund (IOLA). (Judiciary Law S. 497). The purpose of the legislation was to provide financial support to not-for-profit legal service organization who suffered federal budget cuts to their funding. These not-for-profit entities provided direct civil legal assistance to the poor and other underserved populations, such as the elderly and disabled. The source of the IOLA funds is the interest that accrues on these deposits. Since its inception the program has provided over $228 million in grants. All 50 states and the District of Columbia have established programs similar to that in New York.

These accounts have been challenged in the courts as constituting a taking of private property without just compensation, which would violate the Fifth Amendment to the Constitution. On March 26, 2003 the U.S. Supreme Court (Brown v. Legal Foundation of Washington) narrowly decided in favor of these accounts. The Court found that the Fifth Amendment Just Compensation Clause did not apply because without the existence of the IOLA accounts no other depository accounts would exist, and consequently the clients whose money was being held would not have received any interest.

The IOLA Program has suffered as a result of fewer real estate sales, lower prices and low interest rates. According to a study done by the Task Force to Expand Access to Civil Litigation Services, in 2008, these accounts generated $32 million for the Program. opposed to $6.5 million in both 2010 and 2011. The Report further stated in 2010, 2.3 million New Yorkers went through the civil justice system without an attorney.

In an article that appeared in the January 23 issue of the New York Law Journal, the New York State Bar is attempting to mitigate this problem by encouraging its members to contribute some of their time to performing "pro bono" work for those in need.

Attorney and Brown Harris Stevens Senior Managing Director Ed Reale, identified Nassau/Suffolk Law Services and the North Fork Housing Alliance of which Ed is a member of the Board of Directors, as providers of civil legal representation to income eligible residents.

Editor's Note: John will be teaching a 22.5 hours Real Estate Continuing Education classes at Long Island University in Riverhead on March 12, March 14, and March 16. For information and registration contact Rosemary Malone at 631-287-8334 or by email at rosemary.malone@liu.edu.