Shoot First, Ask Questions Later

Some say the road to hell is paved with good intentions.

Like in the case of the well-meaning Realtor who gets their client committed to a home purchase, without the client first having figured out what to do with their lease that doesn’t expire until after closing.

When eventually confronted with the question of why the landlord is unenthusiastic about letting the client out of the lease early, and demanding payment of the rent through the conclusion of the lease, an uninformed Realtor just shrugs and offers platitudes like these:

“Florida law allows for an automatic termination of the lease once you buy a new home.”

 “The standard lease provides for early termination if you buy a new home.”

 “That’s unfair, the landlord can’t do that.”

No one ever said life is fair, especially since there is no such thing as a “standard lease,” and Florida law says absolutely nothing about what happens when a tenant purchases a new home.

Suddenly, the Realtor finds their client in a costly quagmire. What to do?

Put in the most basic terms, a lease – written or oral – is an agreement to pay for the use of someone’s real estate for a specified period of time. Florida’s landlord-tenant act (Florida Statutes ss. 83.40-83.683) governs residential tenancies when there is no written agreement. Other than some basic requirements as to how to deal with advance rents and deposits, and certain basic maintenance duties required of a landlord, what two contracting parties agree to between themselves is entirely up to them.

For this reason, each lease is as unique as the people agreeing to it. From the fill-in-the-blank version you purchase at Office Depot, to the FAR-BAR template, to a lawyer-prepared agreement, each says what it says in its own way, and there is no mandate in the Florida Statutes as to what that agreement must contain.

Put another way, each lease is fact-specific, so you can never assume that what one says or does will be the same for another.

From the savvy Realtor’s perspective, while the client’s existing lease is not really their concern, the Realtor will undoubtedly be the first person the client calls when the landlord refuses to let them out of the lease early, and they’ll likely demand to know how their Realtor could commit them to a purchase knowing they still had a lease.

As is the case with any healthy relationship, a little bit of communication can be a good thing. Should you find yourself in this situation, a good starting point would be to take the following steps:

  • Encourage the client to get their situation figured out in a way that makes it comfortable for them to proceed with their planned purchase.
  • Remind them to read their agreement and understand whether or not they have a termination option, and if they do, how is it exercised, and what will it cost.
  • If they do not understand their lease, they should call their landlord, or better yet, seek the advice of a real estate attorney to gain a better understanding of their options before they approach the landlord and/or the purchase offer you’re working on for them.
  • Once they understand their options, they should pursue some sort of written resolution of the lease – either on their own, or with their real estate attorney’s assistance.

Meanwhile, document the action you’ve recommended so there is no question later about what advice you gave. It can be as simple as: “since you wish to purchase a home while you’re still obligated under a lease, we discussed that you’re going to take the following action to deal with your lease…. And, once you have this figured out, you will let me know when and how you wish to proceed with a purchase offer.”

Short, sweet, to the point, making it clear it is the client’s responsibility to deal with their lease, and under no circumstances are you promoting them making a large purchase commitment without first understanding their existing rental obligation and its financial impact.

Further, this is not a suggestion that you insinuate yourself into the lease termination discussion or process. Your goal is simply to make sure your client recognizes their existing obligation, and takes some action to address the situation so they don’t wake up weeks down the road with a major purchase obligation layered on top of a potentially significant lease obligation.

As always, never hesitate to consult with an experienced real estate attorney if you have questions about your role in helping clients with an unresolved lease commitment, or likewise if your clients need assistance achieving a resolution of their lease in order to move forward on their new home purchase.

# # #

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

Would You Like Fries With That?

Castle frontWe’ve all been there: that crucial moment of decision when faced with an option that can add cost (Leather upholstery? Carpeted floor mats? V-8 engine?), and even calories (French fries? An extra scoop of ice cream? Bearnaise sauce?).

Thanks to the US government’s consumer protection regulations, buyers who finance their homes using mortgages are now advised that owners title insurance coverage is “optional.”  Buyers who read their closing disclosures closely are keying into this description, and beginning to wonder whether they actually need such coverage, especially since it is spelled out as an extra cost item.

The short answer to this query is YES, but know that I am biased; our firm issues the title insurance policy.

The purpose of title insurance is to eliminate risks and prevent losses caused by defects in title arising out of events that have happened in the past.  To achieve this, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject real estate. Those claims are either eliminated prior to the issuance of a title policy or their existence is excepted from coverage.

Mortgage companies require a lender’s policy of title insurance for their benefit in connection with closing, therefore the description of the owner’s coverage as “optional.”  The lender’s policy doesn’t do a thing for the homeowner.  It only insures that the mortgage is a first lien.

The lender, of course, would be concerned IF the buyer lost title to the property, but only WHEN that occurred. The lender would be concerned IF they found out there is a judgment or municipal lien ahead of their mortgage in lien priority, but only WHEN the mortgage is in foreclosure.

Put another way, the lender gets concerned once the tragedy has already happened. An owner is concerned before it gets that far.

Since the title policy is an indemnity contract for losses, the mortgage company must suffer a loss before they actually have a claim under the lender’s title policy. Therefore, they must proceed to foreclosure, sell the property and obtain less than the debt due on the loan. By that time the owner has been ejected from the property.  And, without an owner’s policy, a buyer is not covered and must pay someone else’s debt.

Given these risks, why is owner’s title coverage  now being considered “optional,” and why do lender’s title insurance policies all of a sudden seem so expensive?

Under Federal rules, the lender is required to lump a majority of the title insurance cost into the lender’s required coverage.  This is basically opposite of what Florida law provides, i.e., the bulk of the cost of the title insurance is associated with the owner’s policy, and the cost of the lender’s coverage is an incremental addition.

So, while the substance of what title insurance coverage is hasn’t changed, the disclosure rules relating to its costs have, leading to confusion and concern by consumers feeling like they’re being upsold for something they don’t necessarily need.

In such a case, the old adage of “penny wise and pound foolish” certainly applies, and an informed consumer should not feel guilty about incurring the incremental cost of the so-called “optional” owner’s title insurance, especially if he or she considers the protection of their substantial real estate investment a #1 priority.

# # #

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