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!

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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

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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.

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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.

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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

Ticking Timebomb (Partially) Diffused?

Some months back I posed the question whether you had ever taken a good look at the Section 8 financing contingency in the FAR/BAR contract forms?  I then went into some detail about how that contingency, if not properly monitored, could have unintended consequences leaving a seller with no hope of compensation in the event of a late-occurring buyer cancellation for failure of financing.

Fast-forward to the newly-promulgated FAR/BAR-2 forms (published 9/3/13), which address some of the old Section 8’s shortcomings by providing a more clearly defined process for cancellation, along with deadlines that help to avoid potential closing day bombshells.  Whether the revisions are panacea is up to you to decide once you’ve given the updated forms a test drive.  In the meantime, what follows is my initial analysis of what the rewrite accomplishes, and how that impacts both listing and selling agents:

The revised Section 8 now reins in a buyer’s unfettered right of cancellation up to the day of closing for lack of receipt of loan commitment.  The updated provision requires a buyer to provide notice of loan commitment when received.  And, if the loan commitment is not received by the loan commitment deadline, then thereafter “either party may cancel [the] Contract up to the earlier of: (i) Buyer’s delivery of written notice to Seller that Buyer has either received Loan Commitment or elected to waive the financing contingency of [the] Contract; or (ii) 7 days prior to the Closing Date.”  The contract goes on to provide that the buyer is entitled to their deposit back, but only if the cancellation is timely and buyer is not otherwise in default when the cancellation occurs. Most importantly, “if neither party has timely cancelled [the] Contract pursuant to…Paragraph 8, then [the] financing contingency shall be deemed waived by Buyer.”

What the revised provision does not do is remove the caveat that allows the buyer, having given notice of receipt of the loan commitment, to thereafter cancel for the 4 reasons enumerated in lines 110-113 of the contract form (seller’s failure to perform, failure of property-related loan conditions, failure of appraisal, or bank failure), in which case the buyer’s deposit is returned.

My advice to listing agents therefore remains the same: keep abreast of the so-called Loan Commitment Date, and have your seller be prepared to cancel the contract if the Loan Commitment Date comes and goes with no notice from the buyer of receipt of the loan commitment (note – only notice is still required, not an actual copy of the commitment).  At the very least, the threat of cancellation can spur some conversation between the parties to perhaps bring this portion of the contingency to a conclusion so the seller has peace of mind going forward.  If such an approach is too aggressive for your seller’s taste, then at least you can rest assured knowing that the contingency comes to a somewhat timely conclusion by virtue of the new terms and deadlines it contains.

Once you are beyond that hurdle, though, you still have the issue of the appraisal carve-out. A non-confrontational way to timely nip that in the bud is to ask that the FAR/BAR appraisal addendum be included with the contract.  A more specific approach is to have the closing attorney perform surgery on the contract by deleting language and/or preparing replacement language for the contract or in an addendum.  The risk you run with the surgical approach is that the buyer will construe your seller’s quest for peace of mind as an attempt to de-claw his/her financing contingency and become offended, putting your negotiations in jeopardy.

Likewise, if you are on the selling side, my advice is also essentially same as before: a fair deadline for the Loan Commitment Date gives most lenders the time they need to resolve appraisal and other underwriting conditions, so a seller’s counter-offer seeking to tighten the reins on this contingency is not out of line, and should not be construed as anything other than what it is – an attempt to give the seller certainty that after a specific date, the deal is solid.

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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