Real Estate Transactions Outline
REAL ESTATE BROKERS
1. Brokers. Brokers market or attempt to lease land for another for compensation. Sellers contract w/ a broker to be his agent and agree to pay broker a commission if successful.
Real estate broker
Real estate salesperson (AKA sales agent)
Works for broker and acts under broker's supervision
Broker's trade ass'n:
Local and nat'l brokers ass'n. Only members of National Ass’n of Realtors can himself a realtor. Create professional codes and rules, promulgate standard forms, and lobby gov't.
Works with seller.
Works with buyer. Paid from listing agent's commission, so legally seller's agent. Trade ass'n rules specify how commission is split.
Works with and owes fid duties to buyer.
a. Licensing Req': real estate brokers must be licensed.
i. Lawyer turf war. Brokers cannot practice law. Likewise, law license does not allow L to act as a broker (market someone else's property for compensation). Some states (MN) let L act as real estate agents.
ii. No license —-> lose commission, unless person w/o license merely introduces buyer & seller (“finders fee”)
b. Scope of Broker's authority— no power to sell, unless clearly stated.
i. equal dignities rule.
c. Discount Brokers : “fee for service” brokers charge only for services the consumer actually buys.
i. Minimum Service laws harm consumers
2. Listing Agreements
a. SOF. Must be written in nearly all jurisxs (but SOF for real estate conveyances does not apply)
b. Essential terms. (1) duration of listing (2) offering price (3) accrual of commission (4) execution by all owners
Seller must pay commission if broker is “procuring cause” of a sale. Seller MAY sell on his own and use other brokers WITHOUT incurring the commission.
· Broker lacks incentive to work
Exclusive Agency Listing.
Only one broker can sell for a period of time. Seller MAY sell on his own WITHOUT incurring commission, but can't use other brokers
Exclusive Sale Listing
Sale of property during a specific period (by anyone) triggers commission. Implies duty that broker use best efforts
· Incentivizes broker, but restricts seller
i. Majority (Default) Rule: Unless agreed otherwise, broker earns a commission when he produces a buyer ready, willing, and able to purchase, even if sale is not closed.
· Offer is key. Offer, not execution of sales K, triggers commission. But the execution of a K may evidence seller acknowledgement that the buyer's is ready and able to buy.
· Offer must be unconditional (no financing contingency)
· Seller defense despite offer: (1) Broker violated a fid duty by not disclosing facts buyer was not ready, willing, and able. (2) K incorporated a Dobbs-type rule
ii. Dobbs Rule: for reasons of public policy, every brokerage K includes the implied provision that a commission is not earned unless the K of sale is performed, ABSENT default by the seller.
· No closing —> no commission (unless frustrated by seller.) Drake.
· Seller default—> commission is still owed. But Buyer must make tender of payment to demonstrate they were willing to perform.
For traditional rule
For minority rule
· Agent is not insurer. He finds buyers, and does not make sure buyer performs
· Broker should be compensated for services, even if sale falls through.
· Freedom of K
· By voluntarily entering sale K, seller accepts the qualifications of buyer and should be estopped to deny otherwise.
· Buyer gets fucked if sale falls through. Seller will not have funds to pay a commission if he does not close. [This extends the applicability of rule beyond financial risks.] · Broker has expertise to find buyer's financial info (risk of default), and should bear the risk accordingly
· Broker does NOT produce a “ready, willing and able” buyer if the buyer refuses or is unable to close
· Buyer will have to pay commission twice if he sells later
3. Fiduciary Duties of Brokers
a. Ambiguous role of brokers. Brokers are a go-between and may try to sway sellers against their best interests to close sale quickly, e.g. to come down in price. Some cases may be breach of fid duty.
i. Dual agency. Brokers may represent buyer & seller. Perilous because it requires loyalty to parties with adverse interests. Dual agent must disclose existence of dual agency to both principals.
· Minn. Stat.: commission forfeited if dual agency is not disclosed. Certain statutorily prescribed language must be put in listing K as for disclosure.
ii. Non-agent broker (“transx broker”). Broker does not act as agent of either party but facilitates transx for both sides. This creates a duty of evenhandedness and non-disclosure.
b. Listing agent = seller's agent. Therefore, broker has a duty to act on behalf of and in the best interest of the seller, without COI. Duties include (1) confidentiality, (2) disclosure (3) reasonable care (4) accounting (5) obedience. Broker must disclose to seller facts re buyer's financial condition showing buyer is not ready, willing, and able to make transx.
c. Listing agent’s liability to BUYER
i. Affirmative Misrepresentation to Buyer
1) A statement of a material fact
2) Which D either knows or should know is false
3) On which P reasonably relies
4) Causing P damages
ii. Duty to Disclose Material Latent Defect. Broker has duty to disclose to buyer material defects known to the broker but not observable by the buyer upon inspection.
1) Broker has actual knowledge of defect
2) Defect is material [Objective standard– because buyer is interested in resale.] 3) Defect is latent [Not a matter of public record] iii. Duty to inspect? In Cal, broker also a duty to make reasonable inspection of the property to discover defects. Easton v. Strassburger (CA) [Rule subsequently mitigated by statute.] c. Selling Agent = seller's subagent. Selling agent (who is hired by the buyer) is an agent of listing agent and paid a part of the listing agent’s commission. This is often misunderstood by buyers.
· Minn. Stat. buyer's agents are required to make explicit disclosure to the buyer saying he is the seller's agent.
d. Buyer's Broker = buyer's agent. Buyer-broker agreements designate the selling agent as the buyer's agent.
· Compensation: buyer must pay buyer's broker. But commission can still be paid from the listing agreement (i.e. by seller). This creates a moral hazard (high price = more commission = fucks buyer)
· Exclusivity: buyer's agent may be exclusive, so if buyer uses another broker or goes solo, he still has to pay commission.
1. SOF applies : Sale K involves transfer of an interest in land. Oral Ks may be enforceable by estoppel. (standard or reliance varies– depends on buyer's payment, possession, improvements on property, etc.)
2. Essential terms: (1) parties (2) description of property (3) sale price (4) signature (5) duty to convey
3. Conditional terms: [Condition = event not certain to occur which, unless occurrence is waived, excuses further performance of K; “Subject to” clauses. The party charged with enforcing the condition may waive the condition
a. Condition of title. Buyer can refuse performance for title defect. Details ability to cure for seller.
Should also contain reps re title quality, listing acceptable encumbrances. If overly vague (b/c lack of research), may cause dispute
b. Financing Clauses. buyer can refuse performance if he does not get mort commitment
i. Buyer can waive and pay in cash
ii. Should describe loan amount, loan term, max interest rate
iii. Implies promise by Buyer to use reasonable efforts to get financing, usually has to go to multiple lenders unless futile.
iv. Vendor satisfy this condition by offering to finance the purchase, unless the K language provides otherwise (ex. Requires institutional lender)
absent a financing clause, the default rule is that the buyer must purchase in cash, even if she cannot get financing.
c. Sale of Buyer's property
d. Tenant estoppel certificate. Statement by tenant saying buyer won't step into liability as new LL
e. Lender estoppel certificate & due on sale waiver if buyer takes over existing mort .
· Says seller is not in default and lists loan terms
· Estops lender from claiming due on sale.
· Lender only required to provide estoppel certificate if the mortgage says so
f. Authorize buyer's inspection
4. Other Terms
a. Closing date & time. In equity, failure to perform on the closing date is not a breach unless K says “time is of the essence”. In law, time is always of the essence but little damages will result. If no closing date is include, “within a reasonable time” will be inferred.
b. Title covenants (that go in deed)
c. Earnest money & forfeiture. Earnest money should be enough to cover commission or seller could get fucked.
d. personal property to be transferred, plus representations
e. Reps* re title quality & property condition
g. Risk of loss. Otherwise equitable conversion will apply
h. Payment of incidental expenses. property taxes, special assessments, recording costs, escrow and closing fee
i. Seller's duty to pay commission to broker. May assign part of earnest money to broker for commission if sale falls through.
j. Arbitration clause
· In MN, arbitration clauses for sale Ks must be on a separate document, so buyers are aware of their choice.
· Wise buyers don’t agree to arbitrate because : 1) rules are written by realtor ass'n, 2) arbitrators may be institutionally biased b/c beholden to real estate companies for business, 3) lose rights to discovery, appeal, etc. 4) real estate companies have way more experience in arbitration, 5) you can always agree to arbitrate when a dispute arises.
1. Express Covenants. Mot sale Ks address title quality.
Title must be insurable by title company. Courts interpret this as meaning, insurable by any title company. Buyer should at least specify what title company standard he would accept because some title companies will exclude many defects from coverage.
Just says 3d party does not have 'better' interest than seller does.
Parties may disclaim any title covenant OR with regard to specific encumbrances
2. Implied Covenant of Marketability : Even without an express condition, every sale K has an implied covenant that title will be marketable, unless otherwise agreed.
3. Remedy: A buyer can refuse to perform if seller fails to produce evidence of acceptable title (rescission)
4. Timing & Me
gment debtor's interest in land which he is buying under an executory K.
i. Divided. Jurisx are divided on whether a judgment docketed against seller may attach to his interest in executory period. There is more agreement about status of buyer's interest.
ii. Danger to buyers using installment K? If EC applies, would buyer's payment to seller after execution not apply toward the sale price? Courts likely would find that buyer's payments operate to pay for Inst. Sale K until buyer gets *actual* notice that the seller's interest was levied. [Cannefax is wrong]
Cannefax v. Clement
Held, seller's interest in an executory K is not “real property” subject to a judgment lien. Reason, if a seller's interest in an executory land K could be attached, buyer would risk that a judgment could be docketed while he was making payments. Payments to the vendor would not be useful to get title.
4. EC Applied: Risk of Loss.
a. Majority Rule: EC means that buyer is the “owner” of the real estate during the executory period. Therefore, buyer bears the risk of loss of the property during the executory period.
i. EC does NOT shift risk if
1. If party is responsible for the loss
2. if risk of loss is addressed by K. [should always be] ii. Marketable Title may conflict with EC.
§ BUYER argues seller bears risk because the change made title unmarketable. Marketability is tested at the time of closing. SELLER argues buyer bears the risk b/c of EC
b. Critique of majority rule: (1) K was made on the assumption that property is fair consideration for the purchase price. If property is destroyed, the exchange is no longer fair. K is a nullity and parties should re-negotiate. (2) Buyer is not the party most likely to carry insurance for loss. (3) The party in possession is the best person to mitigate/prevent losses. They should bear the risk.
c. Minority Rule: EC does not shift risk. Risk passes to buyer either when buyer takes possession or when he receives title. Uniform Vendor Purchase Risk Act [Adopted in 11 states (not MN)] · Creates an implied K term that the party in possession bears the risk of loss, unless parties K out
Sec. 1 Risk of loss
Any (land sale K) is interpreted as including an agreement that…, unless K expressly provides otherwise:
a. vendor cannot enforce K, and purchaser can recover any payment already made if
· When NEITHER legal title NOR possession has been transferred,
· all or a MATERIAL PART is DESTROYED w/o fault of purchaser or is taken by eminent domain,
b. purchaser must still pay the price and cannot recover price already paid if
· when EITHER legal title OR possession has been transferred,
· all or any part is destroyed w/o fault of the vendor or is taken by eminent domain,
5. Insurance in Executory Period
a. Vendor’s insurance. Equity imposes a constructive trust on the proceeds of the policy to the benefit of the party bearing the risk of loss, UP TO the purchase price. Sale price is reduced by the same amount.
· Circumvents rule that insurance K is personal to parties to it.
· Less commonly, buyer holds insurance but seller bears risk. If so, most courts do not require insurer to pay anything because buyer suffers no actual loss.
b. Vendor's insurance includes purchaser as additional insured. Purchaser has the right to participate in the settlement of claim and get the proceeds. (best option for buyer)
c. Vendor endorses policy to the purchaser. Buyer has no right to participate in settlement of claim, but has right to share in the proceeds.
i. Deed Overview: A deed is a document that transfers a real interest in property. It is not the only way; adverse possession, wills, and court decrees can also transfer title.
a. Not equivalent to title. There is no “official” deed to a piece of land passed from owner to owner. Deed handed back to grantor does nothing.
c. Can give rights to grantor.
i. Exception = grantor keeps a previously existing interest (“except south fifty feet”)
ii. Reservation = creates a new interest for grantor (“reserve a life estate”)
· At CL, exceptions and reservation could not create an interest for a 3d party. Grantor had to keep an interest for himself and then convey that to the 3d party. This rule is often ignored.
d. Effective upon delivery. Changes made after delivery are ineffective.