The Day The Wall Came Crashing Down

GetMedia[1]A client was awaiting closing on the sale of her historic home when one day, lo and behold, the rustic old wall along a perimeter of the property came crashing down.

Ay yi yi.

Just one more headache in the protracted process of selling a home with a long and storied history, but one with the kind of deferred maintenance that caused the owner’s (shrewd) Realtor to demand an As-Is Residential Contract for Sale and Purchase for all offers received.

According to that form: “Except for ordinary wear and tear and Casualty Loss, Seller shall maintain the Property, including, but not limited, lawn, shrubbery and pool, in the condition existing as of Effective Date (“AS IS Maintenance Requirement”).”

So what to do in a case like this where the wall was in an obvious state of disrepair at the outset, but just couldn’t hold itself together long enough for the closing to occur?

Put another way, given the contract’s AS IS Maintenance Requirement, how do you bring something like this back to its same decrepit state as of the Effective Date, or quantify the expense for doing so?  By extension, does it then become the seller’s obligation to provide a new replacement for what fell apart in the interim, the cost of which can be substantial?

In this case, no contractor who visited the property was able (or willing) to give an estimate for anything other than a proper repair and replacement.  What ended up transpiring was a negotiated credit that covered a portion of the estimated repair cost.  What first took place was quite a bit of conversation about the blurry nature of the parties’ respective rights and obligations under the contract, and what anyone was legally required to do.

From a technical perspective, the contract probably cannot reasonably be expected to give explicit guidance on this subject matter.  What this does, though, is land everyone smack dab in one of those gray areas that lawyers love (we make a good living in that space), and Realtors detest (“Just tell me what to do so we can get this closed!”).

What, then, is the smart listing agent to do when preparing to present a property with known (or anticipated) structural challenges?  Here are a few thoughts to get you started:

  1. Take a good long look around for readily observable issues, such as active leaks, foundation cracks, shaky fences and walls, etc.  The things any regular person might be reasonably expected to notice.
  2. Ask the seller to be thorough and candid in filling out their disclosure, and include any known and/or observable issues about which they have concern.
  3. Require all offers to be submitted using the As-Is Residential Contract for Sale and Purchase.
  4. Consider specifically addressing trouble spots in the contract, i.e., “Perimeter wall is specifically excepted from Seller’s AS-IS Maintenance Requirement and will be conveyed to Buyer in its as-is condition at the time of Closing, regardless of whether the condition has changed beyond the extent of ordinary wear and tear.”

This is not to suggest that the agent is taking the place of the home inspector, or the seller’s disclosure is meant to take the place of the buyer’s thorough review of the property.  Where the agent wants to end up – to the extent this can be achieved through clear and concise contract drafting – is in a bright line situation where one and all agree that items of concern that could deteriorate substantially between the Effective Date and Closing are not something for which the seller is financially responsible (think active roof leak…).

As always, you are encouraged to seek the advice of an experienced real estate attorney should you run across issues such as these and need a helping hand when the time comes to respond to an offer.  Bright lines are best established when there is time to think through the situation, rather than when deadlines are looming and pieces of history come crashing down around you.

# # #

This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

Advertisements

Performing At Your Peak: Doing Laser Surgery With A Machete

Imagine being at the dermatologist’s office to get a mole removed, and she walks in brandishing a machete, rather than a scalpel?! Chances are you may think that even the most skilled technician might end up taking more of you with her than was intended (or necessary) for such a precise operation.

In the real estate game, the same thing happens when the time comes to excise a contingency from a ratified contract. Sellers’ markets beget demanding listing agents who, in return for a hard-fought concession, insist that a specific contingency – or worse, “all contingencies” – be lifted.

Eager to please and keep the deal rolling toward its intended conclusion, the unwitting agent who uses a machete, rather than a laser, to accomplish this task can back into a heap of unintended consequences.

Periwinkle back

Aside from the obvious inspection and financing contingencies within the FAR/BAR contract forms (each of which contingencies contain their own nuances and variables), agents tend to forget about those other matters upon which the contract is contingent, such as:

  • The seller’s obligation to convey marketable title
  • Survey-related issues
  • Permit close-out
  • Flood zone determination and insurability

…and so forth and so on.

Take, for example, the occasion under the regular FAR/BAR repair-limits contract when a seller agrees to address inspection-related matters, and the listing agent requests that in return the buyer “remove the inspection contingency.” A simple addendum saying “Buyer removes the inspection contingency in return for Seller repairing XXX prior to Closing” is defective for a variety of reasons, including the following:

  1. The contract form provides various specific definitions, including the meaning of “Inspection Period” within the “Property Inspection and Repair” section. There is no definition of “inspection contingency.” Therefore, such a reference is both overly broad, not to mention ambiguous.
  2. There are three different inspection topics within this section (“General Inspection,” “WDO Inspection,” and “Permit Inspection”), each with its own repair limit, and each dealing with a specific subject matter. A blanket removal of all inspection contingencies would theoretically terminate, for example, the obligation of a seller to correct costly permit or municipal lien violations that may exist or, worse yet, which may not have been revealed because the municipal lien search was not yet in hand when the General Inspection was completed and the repair concession negotiated.
  3. The walk-through inspection right (and Seller’s obligation to provide access for same) is contained in the same section of the contract. Depending on whether or not the parties are getting along, a blanket removal of “all inspection contingencies” could be viewed by an antagonistic seller as a waiver of the buyer’s final walk-through right and seller’s obligation with respect to same.

Similar care should be taken when assigning obligations to and as between parties. Take the situation where the responsibility for selecting and paying for title services is negotiated back and forth, and all three of the check boxes within the FAR/BAR contract’s Title Evidence and Insurance section end up deleted and replaced with a simple “Seller to pick and pay for title.”

In this case, kudos to the selling Realtor for pulling off a coup (whether or not intended) by moving the lender’s title insurance expense – a buyer cost even when the seller selects and pays for owner’s coverage – to the seller’s side of the balance sheet.

And, shame on the listing agent who wasn’t familiar enough with the standard contract form to realize that this deceptively simple alteration deleted a benefit contained in the pre-printed provision, and instead obligated their client to higher closing costs.

I could go on and on with stories of such unintended consequences where well-meaning agents were led astray by demands for some sort of action and the desire to get something – anything – in writing in order keep a deal moving (just imagine the fallout from the following addendum language, which I have seen used on far too many occasions: “Buyer lifts all contingencies to closing and Buyer’s earnest money deposit is non-refundable”…).

Suffice to say that too great an understanding of the standard contract form set is never a bad thing, and the knowledge of each form’s contents and inner-workings breeds nothing but a better intuition about how to deal with situations where a general request (or demand) can potentially lead to disaster.

As always, we are eager to assist with your contract and closing needs, and every request for assistance with contract formation or drafting is an opportunity for us to educate our agent friends about this essential, but highly technical, aspect of their business. Peak understanding leads to peak performance (not to mention satisfied, long-term clients), and we appreciate every chance we have to help our agents reach for the sky!

# # #

This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

Believing Miss Mildred (a true parable of shade trees, neighborly trust, and a bottomless cup of coffee)

Miss Mildred

Once upon a time, a young fresh family bought a fine old home in a fine old subdivision dotted with a veritable forest of fine old shade trees and lakes, not to mention neighbors of a similarly fine old stature.

One day, the young fresh family brought home a frisky new puppy. Nothing would do but to fence in their fine old back yard to protect their new faithful friend. Daddy James, a real estate professional, went next-door to see Miss Mildred, their fine old neighbor who had lived in the fine old neighborhood for nearly too many years to count.

Miss Mildred, aside from knowing her way around the kitchen, was a fountain of knowledge on all things important to their fine old neighborhood, including who owned what, and what went where.

In this case, the question was whether the fine old oak tree between their two properties was on the young fresh family’s side of the line, or Miss Mildred’s?  It seems that James, the real estate professional, had not procured a survey when the young fresh family purchased their fine old home.

Over an endless cup of coffee and a scrumptious piece of homemade cake, Miss Mildred opined as to how the fine old oak tree was on her side of the dividing line. Unwilling to question such an acknowledged neighborhood authority, James, the real estate professional, reckoned that their new fence should be placed on the young fresh family’s side of the tree.

Nary a word was ever spoken again on the subject until the young fresh family expanded, and the time came to move to a larger, finer new home.  Much to everyone’s surprise, the buyer’s survey revealed that the young fresh family’s fence had been installed a couple of feet inside of their actual property line!

When questioned by the buyer’s Realtor, then the closing attorney, James, the real estate professional, happily recounted the story of coffee and conversation with Miss Mildred, and insisted her assessment of the boundary line location was correct. His devotion to his future former neighbor was so staunch, in fact, that James stated emphatically and with increasing ire that the buyer’s survey was incorrect, and that was that.

With emotions at a fever pitch, the buyer’s attorney ordered his own survey of the questionable property line to check the work of the prior surveyor. Lo and behold, the lines matched to a tee.

Finally seeing the writing on the wall, James, the real estate professional, agreed that perhaps the buyer’s request to relocate the fence was reasonable, and hat in hand he trekked over to Miss Mildred’s house one last time to deliver the news. An eminently practical woman, not to mention a frugal one, Miss Mildred politely agreed that two surveyors could not possibly be wrong, and in fact perhaps it was her memory that had gotten a little fuzzy after all these years. Work soon commenced to relocate the fence, and the closing happened without further ado.

The moral of the story is that fine old neighbors can be a treasure trove of community knowledge, not to mention hospitality.  Unless, however, they are licensed surveyors, their insights on the precise location of boundary lines and other technical matters best be regarded as anecdotal, and leave the measurements and legal opinions up to the professionals.

# # #

This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

FIRPTA and the First Day Effect

Island bayouThe days of our lives are scattered with those first times we always remember – a new school, a new job, a new year, a new romance – those milestones that come and go, and in the lead-up can be the impetus for a new way of doing things, different from how we approached or looked at life before.

Thanks to an impending rule change by the Internal Revenue Service (IRS), on February 17, 2016 the rate of income tax withholding in connection with the disposition of a U.S. real property interest to which a foreign person is subject increases to fifteen percent (15%) of the amount realized by the Seller on the transfer, from the present ten percent (10%) level.

Under the rules of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), it is the buyer of real property who is required to withhold the percentage due on the transfer, and remit the withheld amount to the IRS (I) unless an exemption applies, or (ii) the seller has obtained a Withholding Certificate from the IRS authorizing a reduced amount of withholding.

According to noted international tax specialist Renea Glendinning, CPA, “If the buyer fails to withhold the proper amount, they can be held liable for the withholding.  The buyer’s closing agent generally acts on the buyer’s behalf to assist with meeting any withholding obligations.”

Up to now, most buyers were nonchalant about the withholding obligation, and happy to accommodate foreign sellers when it came to allowing them to await receipt of a Withholding Certificate, rather than forcing remittance of the withheld funds at the time of closing.

With the withholding rates going up (and the potential liability getting larger), the rush to the new era seems to have bred a newfound lack of willingness to accommodate foreign sellers in their acquisition of a Withholding Certificate. In the run-up to the rate change, buyers have begun to exercise their rights under a formerly obscure FAR/BAR contract provision to force the remittance at the time of closing, which states in part:

“If prior to Closing Seller has submitted a completed application to the IRS for a Withholding Certificate and has provided to Buyer the [required] notice…but no Withholding Certificate has been received as of Closing, Buyer shall, at Closing, withhold [15%] of the amount realized by Seller on the transfer and, at Buyer’s option, either (a) timely remit the withheld funds to the IRS or (b) place the funds in escrow, at Seller’s expense, with an escrow agent selected by Buyer and pursuant to terms negotiated by the parties, to be subsequently disbursed in accordance with the Withholding Certificate issued by the IRS or remitted directly to the IRS if the Seller’s application is rejected or upon terms set forth in the escrow agreement.”

From a listing agent’s perspective, an unyielding buyer isn’t necessarily a problem or cause for concern, especially from a timing perspective.   A foreign seller does not have to wait until the following calendar year to file their final tax return and obtain any refund due.  Instead, they can make what is referred to as an application for early refund, which is essentially the same application as the one for the reduced withholding.

The difference in this case is the withholding has to have been remitted to the IRS, and the application must include with it copies of the Form 8288-A to document that the withholding has been paid (therefore the reason it cannot be sent until after closing occurs).  The processing is basically the same as with the application for reduced withholding, but when the Withholding Certificate is issued, the refund is obtained from the IRS, rather than from the closing agent for the sale transaction.  Between not being able to send the application in before closing, and having to get the refund from the IRS, it is likely that only an extra month or two has been added to the time the refund is received.

From a selling agent’s perspective, the issue is more nuanced, and the response to the foreign seller wishing to apply for reduced withholding and escrow funds at closing (rather than remit them to the IRS), can depend in large part on how well the buyer is educated on the subject as the contract is first being written.

Especially given the FAR/BAR form’s statement that “[d]ue to the complexity and potential risks of FIRPTA, Buyer and Seller should seek legal and tax advice regarding compliance,” there is never a better time to get an experienced real estate attorney involved than at the beginning of the transaction to advise on the meaning and implications of the buyer’s withholding obligations and options, and help you forge a consensus for the parties as they move forward to closing.

# # #

This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

** Publisher’s note: This post was composed with the valuable assistance of Renea Glendinning, CPA (Kerkering Barberio).

Ever Wonder What Some Attorneys Think Of You?

90There is an obscure provision in the FAR/BAR contract that offers some unique protections to a licensee if – among other things – a party has misrepresented any information to the licensee (or there is incorrect information available in the public records), the licensee makes a faulty third party referral, or any such third party vendor provides defective products or services to a contracting party.

Section 14 of the contract provides in part:

Buyer and Seller (individually, the “Indemnifying Party”), each individually indemnifies, holds harmless, and releases the Broker and Broker’s officers, directors, agents and employees from all liability…including all costs and expenses, and reasonable attorney’s fees at all levels, suffered or incurred…in connection with or arising from claims, demands or causes of action instituted by Buyer or Seller based on:

  1. inaccuracy of information provided by the Indemnifying Party or from public records;
  2. Indemnifying Party’s misstatement(s) or failure to perform contractual obligations;
  3. Broker’s performance, at Indemnifying Party’s request, of any task beyond the scope of services regulated by Chapter 475, F.S., as amended, including Broker’s referral, recommendation or retention of any vendor for, or on behalf of, Indemnifying Party;
  4. products or services provided by any such vendor for, or on behalf of, Indemnifying Party; and
  5. expenses incurred by any such vendor. 

Buyer and Seller each assumes full responsibility for selecting and compensating their respective vendors and paying their other costs under this Contract whether or not the transaction closes.”

There is a small fraternity of attorneys who will insist this provision be stricken from the contract offer. 

This leaves buyers and sellers off the hook for any misrepresentations they may have made, and the licensee open to claim in the event one of their recommended referrals (i.e., home inspector, lender, closing agent, roofer, electrician, pest inspector, handyman, surveyor, septic inspector, plumber, and so on) renders defective service.  It also removes the specific responsibility for sellers and buyers to pay for the services of the third party vendors they utilize.

For a seller or buyer, this is not an unhappy turn of events – they’re not on the hook financially, or for being less than forthright.  Yet the licensee is potentially liable for the actions of the third parties the licensee refers, and possibly the fees for said vendors if the party fails to pay.

So what do you do when put in such a position?

You want to render comprehensive service and guidance to your client, yet with the stroke of a pen, their attorney leaves you holding the proverbial bag for your professional efforts.

Do you raise an objection and risk creating an adversarial atmosphere?  Or, do you just go about your business with fingers crossed, hoping that everyone performs as expected (and you don’t run into a situation like the one [true story] where the respected home and pest inspectors both missed the massive termite infestation in the property’s truss system, necessitating tens of thousands of dollars of post-closing repairs for the unwitting buyer)?

Dishonesty and misrepresentation can be difficult to peg.  According to Realtor Magazine: “Use..seller disclosure forms (and be sure that the seller fills out the form). [D]ocument sellers’ sources of information and encourage the use of other professionals, such as inspectors and attorneys, whenever appropriate. Avoid making predictions, such as “This well will never run dry” or “The value of this house is sure to appreciate.” They’re recipes for disaster.“

On the referral issue, you can simply pass along the third party referral responsibilities to the client’s attorney, leaving yourself free from any possible liability for defective performance by a vendor.

Most professionals, though, would feel like they were not doing their job, and furthermore maintain a trustworthy network of third party professionals upon which they rely, so a fallback position (and one some brokerages have adopted), is to provide a list of referrals with contact information and a bold-faced disclaimer, and leave it up to the client to make the hiring decision.  You can also ask the client to oversee whomever they hire once the decision is made.

While a discussion on the laws of agency and referral are lengthy enough to fill at least another post (or two), suffice to say that this situation is an excellent reminder to continually vet your third party vendors to ensure their performance is of the quality you expect and your clients deserve, and to always remain vigilant in seeking out forthright clients with which to work.

You will also want to check with your liability insurance carrier to understand what coverage you have, if any, should the work of any of your referral partners turn up defective.

And, when faced with this unique situation where your client’s attorney puts you on the defensive, be sure to alert your broker about the proposed contract revision, and if you proceed in the normal course and wish to make referrals, be very judicious with your selections and utilize your A-Team for every component of the transaction under your control.

# # #

This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

 All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

The Gifts That Keep On Giving: Disguised Waivers of Post-Closing Claims

A3968606_H01_13[1] [1219594]

Like a beautiful bow completes the look of your holiday gift package, many agents and their brokerages like to wrap the purchase process up with a signed walk-through acceptance form to memorialize the results of the final, pre-closing review of the property, and acknowledge its then-existing condition.

A benign version of such a form might offer the option of either:

  1. Acknowledging the inspection was completed, and the results were either satisfactory, or subject to certain enumerated matters to be addressed as the parties may agree; or
  2. Acknowledging the buyer waived the right to a walk-through (and holding the agents and brokerages harmless as a result of such decision).

However, just like flu viruses mutate and become more dangerous each passing year, recently this seemingly innocuous form has – as proffered by some agents and brokerages – begun to take on another purpose: to serve as a blanket waiver of post-closing claims against the seller and the seller’s broker.

The current FAR/BAR-4 contract forms provide as follows regarding the final walk-through inspection:

“On the day prior to the Closing Date, or on Closing Date prior to time of Closing, as specified by Buyer,  Buyer or Buyer’s representative may perform a walk-through (and follow-up walk-through, if necessary) inspection of the Property solely to confirm that all items of Personal Property are on the Property and to verify that Seller has maintained the Property as required by the Maintenance Requirement, and has made repairs and replacements required by [the] Contract, and has met all other contractual obligations.”

Section 14 of the contract advises a buyer to verify property condition and “facts and representations made pursuant to [the] Contract.”   The broker is in turn indemnified and held harmless from claims arising from – among other things – misstatements, inaccuracies, and the parties’ failure to perform contractual obligations.

The contract goes on to state, in BOLD CAPITAL LETTERS:

“Buyer agrees to rely solely on Seller, professional inspectors, and governmental agencies for verification of Property condition, square footage, and facts that materially affect Property value and not on the representations (oral, written, or otherwise), of Broker.”

While the contract clearly enumerates the documentation required of both sellers and buyers in completion of the closing process, nowhere is a written walk-through acceptance listed as one of those necessary documents.  In other words, the parties are under no obligation to sign such a form, much less one that waives any claims as against the seller, the listing agent and/or their brokerage.  An agent’s attempt to delay or hinder the closing based on a party’s refusal to sign such a form would be of no legal consequence.

From the agent’s perspective, imagine the fallout if he or she unwittingly had their client sign the “mutant” disclaimer form casually presented during or after a final walk-through, only to have the buyer discover a latent or undisclosed defect after closing requiring substantial cost to remediate? Hopefully in that case everyone’s malpractice coverage is up to date when the buyer comes calling with the signed waiver form in hand, wondering why their agent allowed, and even encouraged them, to relinquish their rights to future claims prior to closing.

In a nutshell, since there is no defined standard for the form and content of the so-called walk-through acceptance, the devil is in the details when it comes time to consider what is being tendered and the meaning of its terms. 

The smart agent will always avoid committing UPL (the unlicensed practice of law), not to mention malpractice, and consult a real estate attorney to understand what is being asked of them and their client when presented with one of these mutant “acceptance” forms that attempts to have the buyer waive all claims against the seller and their agent and brokerage after closing.

# # #

This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

 All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

Put Your Finger On The Trigger (And Squeeze)

GulfmeadA buyer recently entered into a contract with a long-fuse (6-month) closing, which she negotiated intentionally to accommodate the sale of her existing investment property and facilitate a forward  tax deferred exchange.  The relinquished property was in New York City, a jurisdiction famous for closings fraught with intrigue and delay.  Turns out, our buyer was born under a lucky star, and her Brooklyn property sold and closed – by New York City standards – in record time.

Meanwhile, back in Sarasota, the seller’s agent had repeatedly stated that her client would be able to relocate quickly once the buyer’s New York property sold, so the buyer’s agent dutifully specified in the sale contract that the closing date would be “on or before X date.”  However, when the rubber hit the road and the buyer tried to enforce an earlier closing, the seller – who was enjoying his last, sunny, Siesta Key beachfront summer– decided that the closing date specified in the contract would be just fine with him, and an early move just wasn’t in the cards what with all this nice weather and such…

The moral of this story is that a contract contingency with no triggering mechanism is just a bunch of empty words, the written equivalent of a dog that’s all bark and no bite.  In order to create an enforceable contingency, the closing date provision should have read something like: “Closing shall be X date, although Buyer may elect an earlier Closing Date by giving Seller at least 10 days advance written notice of the earlier Closing Date.”   Short, sweet, to the point, and entirely clear about how the buyer goes about selecting and enforcing an earlier closing.

The same holds true for other types of contingencies.  Case in point, that old favorite “this Contract is contingent upon Seller providing a written real property disclosure within three (3) days of the Effective Date.”    Hard to say what exactly happens if the disclosure is not provided – i.e., does the contract terminate?  Does the buyer get the earnest money deposit back?  Is there a review and termination period subsequent to provision?  Who knows?  There is no stated consequence if the disclosure is not provided, and if it is the buyer’s desire to have a right of termination if the disclosure reveals information not to buyer’s liking, there is nothing stated that gives the buyer this option.  Once again, just a bunch of words that do nothing but make the contract drafter’s shortcomings painfully apparent.

Which all brings me back to the advice I give agents time and time again: your contract is your stock in trade, and if you don’t pay attention to what you’re writing and its practical effects, then you are doing your clients a disservice.  Just as important, you could be opening yourself up to a malpractice claim depending on the importance of the contingency.

As always, I encourage you to consult with an experienced real estate attorney if you have questions about how best to structure your contract and any particular provisions where deposits, closings, and other key elements are involved.

# # #

This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

 All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com