University of Pennsylvania
Real Estate Transactions
Stuart Ebby
Fall 2011
1. The lawyer’s role
The Lawyer should only represent one client: If they represent both the seller and the buyer, he must notify both parties. If there is a conflict between the parties he should withdraw.
Practice Notes:
· get the relationship disclosure signed/in writing
· disclose specific details of all areas of potential conflicts that foreseeably might arise
· once latent conflict becomes overt, need to withdraw
A lawyer representing the lender does not necessarily represent the buyer’s interests; no privity even if the buyer pays the bill, and no duty to the buyer.
Practice Notes:
· from the bank’s POV, if the bank gets paid, end of case but from the borrower’s POV, the restriction affected resale value
· the borrower paid the bank fees but this did not create an obligation by the bank’s lawyer to the borrower
· The bill will read “for services rendered to the bank”
When one party is unrepresented, the lawyer needs to make sure that the unrepresented party understands the transaction occurring.
Practice Notes:
· Let the unrepresented party know that you only represent your client and are looking out for your client’s interests
· By preparing the documents, it is implied that the attorney thinks that the document is valid. If the agreement is unenforceable, need to advise client of this
2. Inception of the deal: real estate brokers and listing agreements
Relationship
Broker/Client relationship = principal/agent (fiduciary duty), must be in writing, regulated by state statute
· Exclusive Right to Sell: If the property sold during term of contract by anyone including owner, the broker is entitled to commission
· Exclusive Agency: cannot hire another agent but owner has the right to sell it himself. If owner sells it through 2nd agent, 1st is due a commission
· Open Listing/Open Agency: Owner says, “if you bring me buyer and we make a deal, I will pay you a commission.” But no promise there won’t be another agent, or try to sell it himself
Conflicts of interests
· Need full disclosure
· Buyer’s agent—sub-agent of the seller’s broker, in practice this is not an issue
Broker’s duty to disclose material facts
· Seller’s broker has a duty to disclose material defects known but unobservable to buyers
o Most courts are unwilling to hold brokers liable for defects that they were unaware of that could have been found by inspection (Exception: CA)
· Buyer’s broker has a duty to disclose material facts to the seller about the buyer, e.g., financial information known to the broker that preventing financing and therefore buyer is unable to close
Commissions
To earn a commission the broker must show:
· Employment: contract, in writing (not usually an issue)
· Direct cause of the sale: efficient procuring cause of the sale
o Break in negotiations—handled through the contract: if silent, then this is litigated.
o Consider contact, time etc., look at the particular circumstances
· Found a buyer who is ready, willing and able to purchase/complete sale
o Ready and willing is not usually an issue
o Able can be problematic (this means financially able)
· Licensed (Required by statute)
Majority Rule (common law): Broker earns commission when agreement of sale signed (broker has a vested contract right when agreement of sale signed). Risk is on the seller.
· Some states: commission is earned at time of sale, but payable at closing
Minority Rule (Ellsworth Dobbs): Broker earns commission at closing (when the agreement of sale is performed); if there is no closing, there is no basis for payment. Risk is on the broker.
· Does not apply if the seller defaults or otherwise causes the deal to fail
· Public policy basis—expectation that the broker does not earn a fee unless the deal goes through; owner expects to use proceeds from sale to pay broker
Practice Notes:
· “If as and when” commission earned at signing, payable at the time of closing: even if there is no closing, it is due at the time closing should have occurred
o Can be percentage based on deposit in the event of default
· If there is a note rather than mortgage financing involved, broker may agree to be paid as owner is paid
3. The Statute of Frauds; essential terms of the contract
Statute of Frauds
Basic contracts: objective indicator of agreement, objective manifestation of mutual assent, expressed or manifested intention of the parties
Enforceability: for specific performance, contract must be in writing and signed by the party being charged (usually the seller):
· Oral contract not void, but not enforceable in equity
o Suit for damages is really a substitute to a suit in equity and therefore is not valid either
o Unenforceable contract = buyer gets deposit back (Would probably get deposit back anyway on a restitution theory)
· Agent signature: authorization to sign must be in writing
· Leases for less than one year do not need to be in writing (term varies by state)
· Writing can be anything (agreement, promise, contract, some memorandum thereof)
o Several related documents, can be almost anything (e.g., corporate board minutes signed by company officer)
o Seller: be weary and use clauses to specify if a document supersedes a previous writing
· Modifications: generally required to be in writing
o Not minor modifications regarding short periods of time
o Don’t rely on anything not in writing, easy enough to send a note confirming
o If time is of the essence, need to restate to enforce
· Recessions: not generally required to be in writing
Essential Elements: 4 Ps and a signature
Parties
· Both spouses if both are named
· Corporation properly named
· Name that matches last recorded deed exactly
Premises
· Gov’t survey, subdivision plat, metes and bounds
· Ensure that the property can be identified with reasonable certainty—if any other property meets the description, it is not a valid agreement
Price
· Assumed to be cash unless otherwise specified
· Appraised value is too vague, but arbitration for determining price may be specific enough
Promise
· Can be inferred
Signature
· can be electronic: federal law prohibits states from saying electronic signature invalid merely because it is electronic
· typed name at the bottom of an email may be sufficient
Non-essential Elements:
· Date
· Place of closing
· Property tax apportionment
· Deed type
· Notary
· Witness
Partial Performance SoF Exceptions:
· Used when it is clear that one party is trying to use SoF requirements to get out of an otherwise legitimate agreement
· Overcomes a lack of writing but NOT lac
ler causes the loss
· This applies only after all contingencies are removed from the agreement (the contract is not enforceable in equity until then)
o Once it is signed and contingencies removed, buyer is entitled to specific performance
· Some states have addressed this by statute—party in possession should have insurance and is in the best position to purchase insurance
Practice Notes:
· Put a clause in the agreement identifying who is responsible for loss and insurance
o Flood insurance is separate
· Identify whether fire or other insured casualty affects the sale
o Cancellation clause is common in residential transactions but not necessarily used in commercial transactions
· Buyer’s POV:
o Have seller agree to maintain existing insurance
o Have insurance endorsed and add buyer as an insured party
o Seller will deduct any insurance proceeds received from the sale price; or
o Assign proceeds to the purchaser.
o Provide that the buyer can get deposit back and cancel transaction
o Applies to any casualty
o Seller pays deductible
· Seller’s POV:
o Buyer will carry own insurance
o Do what is necessary to help the deal go through
o Compromise: option to cancel, threshold amount (e.g., damages exceeding $1000)
o Applies to any insured casualty
Insurance
Replacement value—only if you actually replace; always get fair market value.
Co-insurance: if you intentionally underinsure, the insurance company shares the loss with you so that if there is $50k damage to a $100k property insured for $50k, the insurance payout would be $25k.
· Sale agreement should have a clause indicating that the insurance policy complies with co-insurance requirements for
Financing
Need a provision in AOS making the deal contingent on financing, otherwise there is no such contingency
· If the buyer cannot get financing, he loses deposit and may be liable for damages
· Seller may take a lower offer not contingent on financing
· Distinguish between getting a commitment and actually closing
· By default, a mortgage contingency is waivable by the buyer if the contract is silent
Financing contingency necessary elements:
· Amount
· Interest Rate
o Contingency must include a rate—otherwise void for vagueness.
o Satisfactory to buyer = too vague, buyer essentially has an option to purchase with such a clause
· Term
o Don’t have to include monthly payment—this is redundant
· Points
o This is where the bank makes its money
o Loan fee, origination fee; Same idea
o Bank is better off with cash upfront—when the loan is securitized, the 1 point charge is kept even though the loan is sold; there is an incentive to loan to anyone to earn the fee
