Vincent DiLorenzo
Fall 2013
Real Estate Transactions
New York Judiciary Law 478 – It is unlawful for any person to render legal services unless they are admitted to practice law in the state.
Issue is when broker is doing his thing, is he rendering legal services? That is the issue, they refer this as the unauthorized practice of law.
Brokers in NY are concerned of this, because if it causes damages to someone more than $10,000 it is a class E felony.
Do we need attorneys in residential transactions?
Broker has fiduciary duties to his principle. But who is his principle? Seller or buyer?
Title company insures sufficiency of title. They are at closing as well. Lenders are there. Broker is there.
In New Jersey, they don’t require attorneys. The case claims all they require is disclosure of the condition they set forth.
Dunkin & Hill Realty vs. New York State Department of State
NYDOS honestly believed this was a compromise. Consumer groups don’t. NYSDOS claims brokers are allowed to offer parodies, standardize contracts of sale that are drafted by Bar associations. The broker does not draft it themselves, they use a standard contract drafted by the new york state bare association, or association of bar of state.
They can fill in blinks. But they are not allowed to add additional complex language that determine the parties rights and obligations. When they do this, they are practicing law and rendering legal services.
Broker or non attorney cannot be paid to draft the legal document. If they charge extra fee, they violate judiciary act.
Broker or non attorney can never render LEGAL ADVICE.
Steps to Real Estate Transactions
Step one – List Real Estate with a Broker
When is a broker legally entitled to a commission? Broker represents the seller.
Broker is entitled even though title does not close. So what allows the broker to recover, if its not title closing?
Step Two – Examine the property
Must seller disclose defects? In residential property, there is a duty to disclosure. If a seller is aware of defects and does not disclose, they can be sued for damages JUST FOR FAILING TO DISCLOSE.
Does seller Warrant condition?
If not, how can purchaser ensure satisfactory condition?
Step Three – Parties sign Binders (residential) or letter of Intent (non-residential)
Are these agreements enforceable under the Statute of Frauds?
Step Four- Parties prepare and Execute formal contract of Sale
What contingencies are important to purchaser?
What representations and warranties are important to Purchaser?
Contract typically says all warranties must be true at closing, if not right to cancel. This is a contingency and warranty in one.
Step Five – Parties satisfy pre-closing contingencies
– inspection
– financing
– state of title
– survey
for Non – Residential Property:
– Review leases and service contracts
– Obtain Tenant Estoppel letters –
Encumbrances – rights of 3rd party on property.
Step Six – Draft Closing Documents
Step Seven – Closing of Title, Closing of Loan Transaction, and Recording the Documents
Step Eight – Post – Closing:
– Closing Report
– Final Title Policy
– Receive Recorded Deed
Documents Needed by Seller’s Attorney to Prepare Contract
1) Deed
2) Title Insurance Policy
3) Survey
4) Certificate of Occupancy
5) Building inspection reports ( if any)
6) Existing lender – Contact information
7) Existing Leases
8) Existing Service contracts
Case Study
1) Partnership
a) general partnership, b) Limited Partnership
2) LLC – Limited Liability Corporation
3) C Corporation
4) S Corporation
5) Tenancy in Common
6) Joint venture – no such legal entity. They do so through partnership, llc, or corporation.
Libility; – Joint and Several Liability
Management Power;
Tax Preference
Liability
General Partnership – All partners are liable, jointly and severally.
Management Power
Tenancy in Common
A not getting along with B and C. B and C don’t want A to make decisions that bind them. When coownership, what management power exists? Every co owner has management power, but they only bind each other.
Limited partners
don’t have management power, general partnerships do.
There is one general partner.
In corporations, shareholders elect board of directors, and they elect CEO’s, etc… President has management power.
LLC – each and every member has the management power to bind the LLC, unless that power is restricted by the Articles of Organization or operating agreement.
Tax Exposure
LLC taxed as partnership. No one fully responsible of deaths of LLC
S corporation – different from C only in tax treatment. Allows you to avoid double taxation. Avoid limited liability.
C corporation – different from S as to tax treatment.
BROKERS COMMISSIONS
Fiduciary obligation of a broker
Hypothetical: Owner, Success Properties.
Licht owns company called Real Estate Department Store.
Purchaser interest in property is a Mr. Cunningham.
He was interested in purchasing garage to operate taxi cab business and Success Properties had garage they wanted to sell. Licht contacts Success properties and asked whether they willing to sell. Success says yes they do want to sell. This was an oral communication.
Success wants $850,000. Cunningham willing to pay $790,000. Licht trying to negotiate compromise. They agree on $800,000 Licht acting as intermediary to make agreement.
Parties orally come to an agreement to purchase and sell property.
Parties sign formal contract of sale. They contact attorneys and form contract.
Success Properties does not own this property though now. They did when they negotiated, but success is so in debt, that one creditor forced them to turn over the property to them. But Licht says don’t b
exclusive agent. If another broker is procuring cause, broker with the exclusive agency must be paid a commission, as well as broker who is procuring cause. However seller owes no commission if he or she sells property without aid of a broker. Same as exclusive right to sell but owner can sell directly him self, but not through any other agent.
General Obligations Law – 5701 – Every agreement is void unless some note or memo is written. 5701(10) exceptions: mortgage broker, or real estate broker.
** New York Follows Majority Rule, this rule. No writing required recovering compensation.
When is someone ready and willing? At the time they agree to purchase. This is when broker earns his commission.
Able? At time closing is scheduled would buyer have been ready to purchase? if yes, then he is able. When they get a commitment for financing.
Procuring – must actually do something. Telling someone about property is not enough.
New York – Broker must bring the minds of the parties to an agreement to have procurement. Must be an active participant in the negotiations between the parties.
When commission not paid and broker sues, they bear the burden of proof. Broker can prove procuring cause. Brought property to buyers attention, went to show, negotiated final terms of the sale.
How do we know when someone is ready and willing? As soon as broker secures a purchaser wiling to purchase ON THE TERMS, the seller stipulates they’ve earned their commission, assuming they’ve qualified other factors required. Any evidence that purchaser is ready and willing, that portion of requirement is met.
Success Licht and Cunningham
If purchaser fails to close that isn’t brokers risk. If he has secured purchaser that earlier point in time was willing time, but currently is able to buy but changed their mind, that’s not brokers risk, the seller is still obligated to pay commission.
DWORAK V. MICHALS
Majority Rule: Broker earns his commission, entitled to it, when he produces purchaser who is ready, willing and able upon terms specified by principal or satisfactory to them.
In other states, like NJ or Nebraska – Same as majority but a closing of title is necessary. Here, implied that good faith is involved.
Attorneys like to add the words, “If, as and when… title closes.”
If title does close, as and when, at the closing, seller must hand the broker certified check.
