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Real Estate Transactions
Elon University School of Law
Aycock, William B.

Real Estate Transactions

Fall 2012

Professor Bill Aycock

I. INTRODUCTION

a. Market decisions

i. Value –

ii. Utility – measure of how much an individual values a particular good, service or activity; can be measured by trade-offs

iii. Comparative advantage – lawyer’s expertise in understanding legal rules & infrastructure

iv. Costs

1. Transaction – costs associated with undertaking a particular exchange (i.e. collecting info, negotiating, regulatory compliance)

2. Out-of-pocket – actual expenses incurred in doing a project

3. Opportunity – costs he must now forgo having made a choice to purchase real property

4. Sunk – costs that cannot be recovered when a party abandons a course of action; part of out-of-pocket

5.

b. Lawyer’s Duties

i. Transactional Perspective – what does each side want?

1. P. 1A, p. 4

ii. Transactional Purpose

1. Category of property

2. Quality/quantity of property

3. Objective of exchange

4. Who owns what?

iii. Transactional Planning – identify & manage risk

1. Temporal Risk – risk factors related to time (i.e. past, present, future information about a property or transaction)

2. Transactional Risk – risk related to transaction (i.e. investor, ownership, credit, marketplace, transfer risks)

c. Lawyer’s Professional Responsibility Duties

i. Bohn v. Cody, p. 19 – Bohns loaned daughter $ when her house was in foreclosure and Cody handled closing documents and when daughter didn’t pay, B sued C. IRS had a lien and foreclosed and B lost their $. C met with B w/o his client present but didn’t confirm in writing that he didn’t represent B. C argued B were not his clients and owed no duty. Court disagreed and held C owed duty to B.

1. RULE: Recognize conflict of interest early & deal with it

2. 6 Factor Test to determine if an attorney can be held liable for malpractice absent privity of contract:

a. Extent to which transaction was intended to affect Pl.

b. Forseeability of harm to PL

c. Degree of certainty that Pl suffered injury (closeness of harm)

d. Closeness of the connection between Def.’s conduct & injury (proximity)

e. Policy of preventing harm

f. Burden on legal profession.

3. P. 1C, p. 24

ii. ABA Code of Conduct/ PR (2 handouts)

II. BROKERS (correct name)

a. Miscellaneous

i. Realtor – someone who is part of the National Association of Realtors and can use ®

ii. Working with Real Estate Agents (4)

iii. Unauthorized practice of law?

1. Simple-Complex Test – if transaction is simple, a broker may used standard form instruments and assist in filing in blanks (may not furnish documents for complicated matters i.e. creating easement)

2. Incidental Test – broker drafting instruments is authorized if it is incidental to the broker’s business and the party pays no separate fee for this service

3. NC responded by drafting forms for everything

4. *People/entities are entitled to act on their own behalf as a lawyer or broker

b. Listing Agreements (P. 2A, p. 27)

i. Open Listing –owner saying to any broker if you bring me a ready, willing and able buyer then I will pay you a commission

1. Not Common in residential market

2. Problems occur bc every broker is competing

ii. Exclusive Agency Listing – owner says to broker I am going to hire you as the exclusive broker and if you or any other broker sell this property, I will pay you commission and it is up to you to deal with the other broker

1. Problems occur when broker & owner are competing so if owner finds a buyer, broker’s efforts to sell are futile therefore brokers don’t like

2. Ex.: “should during the time set forth, said property be sold by said broker or any other broker…it is understood that this listing agmt doesn’t prevent me from selling…”

3. See Exclusive Listing Agreement (3 – read)

a. Fixtures – everything stays unless you specify

b. Buyer doesn’t

iii. Net Listing – Owner & broker consult and come up with a price and whatever is excess belongs to broker (not used)

1. Regarded as unethical

2. Problems occur when owner finds a buyer for set amount and broker says no bc they wont get paid

iv. Exclusive Right to Sell Listing – if the property is sold or exchanged or K to sell or exchange to anybody, the broker gets paid (common)

1. Elements for when broker has earned commission:

a. Did someone produce a buyer, ready, willing and able? (doesn’t matter who produces buyer)

b. Did the deal close?

2. Can restrict agreement to exclude certain buyers or be for one buyer

c. Fiduciary Duty

i. Duty of Fair Dealing

1. ALL BROKERS OWE A DUTY OF FAIR DEALING TO BOTH PARTIES

2. Can’t misrepresent or negligently misrepresent or commit fraud

ii. Duty of Loyalty

iii. Duty of Disclosure – broker has a duty to disclose a material fact

1. If asked, you must tell (ex. If you know the basement leaks and broker is asked, broker must clearly answer)

2. Do NOT have to disclose:

a. Lowest price the seller will take

b. Why the seller is selling

c. Highest price the buyer will pay

d. That someone previously lived in the house with Aids

e. That someone was murdered in house (unless asked)

3. If a broker is acting in a situation on his own behalf, he must disclose

iv. Duty of Confidentiality – protects clients from their brokers disclosing their objectives and property that is confidential

v. Dubbs v. Stribling & Associates, p. 30 – Dubbs owned apartment in NY but wanted more space and really wanted to purchase adjoining apartment from neighbor; Dubbs listed their aparmtnet with Stribling and a Stribling agent purchased it after unscuessful attempts to for Dubbs to buy neighbor’s apartment; after contract was signed, neighbor listed apartment and Stribling didn’t tell Dubbs. The court held that after K was signed between buying broker and seller after full disclosure, there was no longer a fiduciary relationship and therefore no duty owed

vi. P. 2B, p. 33

d. Multiple Listing Service (MLS)

i. 92% of sellers using brokers list their property on MLS

ii. If your firm is a member, you must put ALL your listings in MLS

iii. Owner may ask that their property not be listed in MLS, then broker isn’t required to do so

iv. Can list other listings on your website

e. Broker’s Commission

i. Types of Fees

1. Sale of raw land – 10% commission (typical)

2. Sale of developed real estate – ?

3. Sale of shopping center – 2%

ii. Paid commission at closing, but issues arise when deal doesn’t close so then look to listing agmt to see if commission was earned

iii. Commission Earned?

1. Brokers get paid if they are the procuring cause of the sale (proximate cause)

a. Not used much bc in exclusive right to sell, it doesn’t matter who was the procuring cause, the broker is entitled to commission

b. Used in open listing, exclusive agency, commercial or for sale by owner

2. Brokers get paid if they produce a buyer that is “ready, willing and able”

a. Notes

i. Defined

1. Ready

2. Willing to purchase now

3. Financially able & otherwise capable

ii. Status is determined at time the contract is signed

b. Majority Rule – broker earns commission when there is a listing agreement and broker produces a ready, willing and able buyer and the contract is signed

i. Similar to exclusive right to sell because no requirement for closing

ii. Hills v. Lake, p. 35 – broker sued seller for commission when deal didn’t close because of hazardous waste on the premises; court found that seller didn’t owe broker commission because seller’s obligation to remove hazardous materials was a condition of the contract (i.e. mortgage condition) which permitted buyer to terminate agreement.

1. RULE: Requirement that closing need not occur is subject to an exception

c. Minority Rule – broker earns commission when:

i. He produces a ready, willing and able buyer, AND

ii. Buyer enters into a contract, AND

iii. Transaction closes in accordance with contract

d. Exceptions:

i. If deal doesn’t close through fault of seller

ii. Parties can contract around the majority/ minority views

e. In commercial real estate, if a broker has earned a commission and not been paid at time of closing, he can file a lien against the property (Note: not residential).

f. P. 2C, p. 40

g. CD 01

h. Exclusive Buyer Agency Agreement (5) & Non-Exclusive Buyer Agency (6)

iv. Brokers CANNOT pay a fee to someone who is NOT a licensed broker. If a broker does, then both are subject to discipline. No referral, finder or consultant fees. Note: if a lawyer does this state bar can discipline.

1. Ex. Broker is at open house and says if you will give us a referral, we will enter you into a raffle. No and both are wrong.

v. Broker & Lawyer

1. If a lawyer wants to hang out to be a broker, he must be licensed and keep the practice separate.

2. It is ok for an administrator of an estate or trustee to sell real estate

3. In re Roth, p. 55 – Roth represented a client as a lawyer and real estate broker in the same transaction.

a. RULE: a conflict of interest arises when an attorney who is not a licensed real estate broker claims commission for participating as a broker in the purchase or sale of real estate if the attorney also represents one of the parties, except if the brokerage activities are incidental to the legal services rendered and do not generate any entitlement to compensation.

b. RULE: an attorney may not be independently and separately compensated for brokerage services

4. P. 2F, p. 60

rable upon reasonable examination

b. Latent – hidden, not discoverable upon reasonable examination (i.e. termites with no visible evidence)

4. Caveat emptor – “let the buyer be ware”

a. RULE: Seller has no duty to disclose patent defects

b. RULE: seller isn’t liable if defect causes injury after closing

c. Limits:

i. Buyer must have had an unobstructed opportunity to inspect

ii. Seller must not have made an affirmative misrepresentation

iii. Can’t conceal, lie or volunteer that everything is fine when it isn’t

d. RULE: Seller has duty to disclose latent defects of which the seller is aware or should be aware that present an unreasonable risk of harm to persons on the property; if seller knows of latent defect, no longer in caveat emptor

e. Express Allocation of Risk

i. Alires v. McGhee, p. 111 – (leaky basement) buyer contracted for right to inspect and thus buyer could not reasonably rely upon representations of the seller when the truth or falsity of the representation would have been revealed by an inspection of the property and the misrepresentations were made prior to or as part of the contract in which the buyer contracted for right to inspect and agreed that the statements of seller were not warranties and should not replace right of inspection.

1. RULE: Fraudulent misrepresentation = intentional misrepresentation of a material fact which is justifiably relied upon to the detriment of plaintiff.

2. P. 5B

f. Disclosing Inaccurate Info

i. Petrillio v. Bachenberg, p. 188 – lawyer disclosed 2 favorable percolation tests and didn’t disclose the 28 unfavorable tests

1. RULE: lawyer has a duty not to misrepresent negligently the contents of a material document on which he knows others will rely to their financial detriment.

ii. If you as lawyer hear your client make a misrepresentation, you should talk to them and if client will not correct his statement, you should withdraw

g. Asbestos – P. 5C, p. 125

i. Asbestos is not structural soundness so don’t limit inspection to structural soundness

h. Environmental Issues

i. Phase 1 – environmental site assessment –broad records search to see if there has ever been an environmental incident; walk property

ii. Phase 2 – more detailed inspection (soil invasive)

iii. Phase 3 – detailed analysis that involves cleanup

i. Material Defects & Duty to Disclose

i. Statutory Duty to Disclose

ii. Implied Duty to Disclose

1. Van Camp v. Bradford

j. Implied Warranties

i. P. 5E, p. 137

5. Doctrine of Merger – all promises made merge into the deed (doesn’t apply to new construction)

6. “As is” Clause – attempt to shift risk of disclosure to seller

a. Except – fraud or misrepresentation

b. Doesn’t apply to new construction

c. Courts look differently at residential buyers (less educated) than commercial buyers (more educated)

iii. NC Residential Property Disclosure (8)

V. TITLE RISK

a. Title Under Real Estate Contract

i. Marketable Title

1. Risk is on seller

2. Implied promise that seller will convey marketable title

3. If seller cant provide marketable title AT TIME OF CLOSING, buyer doesn’t have an obligation to purchase

4. Test: subject purchaser to litigation

a. NC marketable title “free from reasonable doubt in law or fact as to its validity”

5. No such thing as perfect title

6. Buyer doesn’t have to bring its own quite title action

7. P. 8A, p. 183; P. 8B, p. 186

ii. Encumbrances & Encroachments

1. Restrictive covenants are private agreements that are enforceable between land owners

2. Zoning laws are governmental laws which the government enforces

3. Setback laws must be complied with

4. Subdivision laws – when you divide your land into 2+ tracts and the smallest is less than 10 acres, you must abide by subdivision laws and prepare and record a plat.