Real Estate Transactions
1) Atty Duties and Conflict Pits
a) Problem 1A / the “Drywall Problem” / “Rick’s Problem”
i) Key point for any attorney is to show their work; Chinese drywall problem that may reduce value of house
b) The rent control / shopping center / accounting profits problem
c) And, most expansively, Marsh v. Wallace, where we saw also the ways in which parties to a transaction can come to grief even beyond problems associated with their counsel.
i) Case from the south with the rental buildings, everyone is buddy
ii) Conflicts problem with lawyer: need to get informed consent when you are switching to represent both side of a problem; or else, lawyer is going to get stuck
2) Introduction to Brokers; Brokers and Commissions
a) Types of Listings
i) Problem 2A / “The Sutter’s’ Problem”
(1) Brokers want exclusive right to sell; sellers want open listing; identifies problem of possible price fixing, with brokers all taking 6%; identifies the issue that may come with negotiating for a lower commission rate, as broker may not work quite as hard
(1) Sticker with listings is that the broker is or is not entitled to commission despite possibly not getting the seller for the property
(2) ALSO, law of property governs the enforceability, not real
iii) Open listings
(1) Just what it sounds like; agreement with broker to sell, but you have right to do it yourself or with other broker
(2) Very rarely used: hard to determine who actually sold the house
iv) Exclusive Listings
(1) Same as open, but you can only sell yourself, can’t use another broker
v) Exclusive Right to Sell
(1) Stuck with the broker
(a) More precisely, the broker gets the commission no matter who sells the house
(2) Most common and easiest to use
b) Role of Brokers
i) We also set out the usual methods by which brokers get paid, and by whom, and how much, and the common misperception(s) about where brokers’ duties and loyalties lie.
c) Broker Duties
i) Three primary duties
(1) Loyalty, disclosure, and confidentiality
(a) Disclosure and confidentiality are in mortal conflict
(b) When buyer reps both the buyer and seller: obvious problems
(i) Can come up either by agreement or in function in the course of facilitating a transaction
(c) Listing broker: sellers agent
(d) Seller’s broker: not quite clear, as they deal directly with prospective buyers; BUT, general rule is they are also seller’s agent
ii) Problem 2B / “Brandi and Sarah’s Problem”
(1) Broker works for seller; gets a B who will only offer under S’s asking price; Broker should Just ask the seller to see what the seller wants; she is S’s agent after all
iii) Wolk v. Paino
(1) Buyer waiving a right to inspect is on them, not the broker
iv) Holmes v. Summer
(1) Broker liability here for not telling purchaser that a house was 400K under water and the buyer would be stuck with that debt
(2) Partially a product of housing market in California in the 2000s
(3) Broker has to disclose because if broker doesn’t, who will?
(a) May extend to other situations where broker is the only one who knows of the defect that may have to disclose it
d) Broker Commissions: when are they earned
i) Majority Rule: Ready, willing, and able buyer
(1) So, once a customer is produce by the broker and accepted by the seller, the commission is earned, whether or not the sale is actually consummated
(2) Why have this rule: so many unknowns and risks in real estate transactions, brokers do all they are supposed to do by providing a ready willing and able buyer; anything that causes the deal to fall through after this is beyond the brokers control and, therefore, the broker should not be penalized
(3) Modern trend: toward the minority rule
ii) Minority: ready, willing and able plus sale must close
(1) Exception when it is the vendee’s fault or refusal that caused the deal to fall through
(a) See hillis
(2) Interesting cases under this method: vendee can’t get financing; whose fault is this really?
e) Problems with Broker Commissions
i) Hillis v. Lake
(1) Case with the contaminated water in commercial lot; try to do the deal twice; 2 year window for seller to fix the problem
(2) Minority approach
(3) Possible exception: if reason they don’t close is the buyer’s fault
(4) Courts are very hesitant to give broker commission when no final sale, so the minority rule will be applied very liberally
ii) The Ellsworth Dobbs case
(1) Exception to the commission rules for equitable reasons
(2) If the contract is not consummated because of lack of financial ability of the buyer to perform or because of any other default of his, there is no right to commission against the seller.
(3) On the other hand, if the failure of completion of the contract results from the wrongful act or interference of the seller, the broker's claim is valid and must be paid.
(1) In the absence of default by the seller, the broker's right to commission against the seller comes into existence only when his buyer performs in accordance with the contract of sale
ii) Problem 2D / “Ted and Karen Troops problem”
(1) Facts: K accepted, but never closes
(2) If a buyer defaults: depends on the rule
(3) Buyer fails to get financing: not ready within the ready, willing, and able test
(4) Seller changes their mind: broker gets it still
(a) Can especially be the case when the seller does something shifty and the court starts to feel bad for the broker
2) Brokers and Lawyers; Lawyers and Brokers
a) Brokers acting as lawyers:
i) problems associated with brokers and the unauthorized practice of law—most brokers know a lot of real estate law, and often and increasingly rely upon it for their clients, yet they continue to face prohibitions on the unauthorized practice of law.
ii) As an example of this problem, we looked at Problem 2E / “Pat and Stan’s problem.”
(1) Quality of Title (or the like) question at closing
(2) Clearly a legal question; broker should say as much; reality is broker will answer the question and will be unauthorized practice of law
(a) Breach of ethics for brokers
b) Lawyers acting as brokers: We also talked about problems associated with lawyers acting as brokers, walking through Problem 2G / “Gracie’s problem” and the In re Roth case.
i) In comparing Gracie’s problem and the In re Roth case we saw two different approaches that different jurisdictions take to lawyers acting as brokers without a license.
(a) NJ statute has exception that allows lawyers to be a broker, but only if incidental to the practice of law
(b) IN this case, was not incidental, so lawyer is screwed
(c) Roth case was the lawyer wanting to help out the associate
(i) Yet another example of a court using equity to void a result it didn’t like
(a) Atty wants to broker herself: split the commission
(b) Broad exception for atty as broker here, so lawyer is allowed to do this
uyer at some point prior to closing, while legal title remains with the seller.
i) So: arises when valid and enforceable real estate purchase and sale K
ii) “The doctrine of equitable conversion is a fiction, and its application is limited to the extent necessary to accomplish equity. Thus, the doctrine does not apply where it interferes with other equitable considerations.” Construx of Illinois, Inc. v. Kaiserman, 800 N.E.2d 1267, 1275-1276 (Ill. App. 2003).
(1) Basic Idea: seller gets legal title, buyer equitable until everything closed; but EQUITABLE
(2) Thus, won’t be applied unless it is fair to do so
c) ROL and equitable conversion during executory period
(1) Risk of loss on buyer (old common law rule) (current majority rule)
(a) Rationale for the rule: After signing a K, the purchaser can be forced (through specific performance) to perform, so why wouldn’t they bear the risk?
(b) Receives any benefits of increase in value, so should also bear the corresponding risk of loss
(2) Risk of loss on seller (minority rule)
(3) UVPRA—risk of loss on seller before closing so long as in possession; risk of loss on buyer after closing or if buyer takes possession.
ii) But, these rules can be relaxed when it would be unfair
(1) Courts will do a lot of equity here to avoid unfair outcome
(2) Thus, in holsher, the court stuck the insurance company
(a) Very blatantly doing equity here; clearly were under the ROL on buyer rule, but stuck insurance company because agent made a mistake
7) Terminology for Contracts and the Executory Phase
a) Covenants: Obligations to do or refrain from something in the future
b) Contingencies / Conditions: Something that must be done or happen for the transaction to close
i) We saw the importance of careful drafting of contingencies, and the importance of their sequencing, in the Louisiana Real Estate Commission v. Butler case.
(1) Financing contingency in K, B fails, loses deposit despite this sucking real bad
(2) Reason for the seemingly harsh application: Ks are usually bilateral, so performance is conditioned on the conditions
c) Representations: Express disclosures about material and relevant elements of the transaction
d) Warranties: Disclosures about elements of the transactions, in which risk of qualities or defects are transferred
e) Purchase Money Mortgages (PMM): In the most general sense, a PMM is any mortgage in which credit is extended to allow the debtor to buy or acquire the property on which the mortgage is placed.
i) But the term is generally only used when the seller is the one providing financing.
8) The Condition of the Property and the Duty to Disclose
a) In Perfect v. McAndrew, we saw problems of disclosure related to quantity, and an express discussion of the doctrine of mutual mistake.