March 1st, 2013 at 7:37 pm
As you know, during the course of a transaction, your client receives a lot of documents from escrow. In truth, even though we do our best to make sure they read everything, because of the sheer volume of documents involved in our transaction, that doesn’t always happen. In fact, oftentimes documents will be signed without us seeing them or even knowing they were sent to our client. While this is not an issue in many cases, recently we have seen a problem arise that we wanted to discuss with you.
Specifically, one of the best and seemingly most innocent things an escrow company does is send documents to the buyer and confirm, in writing, that those documents were received. These items take many forms, from the termite report to the CC&Rs to the Preliminary Title Report. In most cases, this is a wonderful thing. We need to make sure that the buyer receives those documents and the receipt produced by escrow proves that fact. What we have seen recently, however, is that many escrow companies are doing more than proving the buyer’s receipt. Instead, the document they send with any particular report is called an “Approval” and, in addition to acknowledging receipt, the buyer is asked to “approve” it. The problem comes when that Approval is signed without any thought or discussion. For example, the Purchase Agreement has a contingency for title or CC&Rs, and has specific timelines and rights that go along with that contingency. If the buyer receives either of these documents from escrow and, without thinking or talking to you, signs this “Approval,” have they impacted their contingency rights? After all, if I sign a the Approval upon receipt, and then read the document, something in it may cause me to want to cancel. Theoretically, however, I have already “approved” the document and an argument can be made that it would be a bad faith breach of contract to now exercise the contingency. The lesson here is obvious. Make sure your buyers know to run all documents by you before they sign them and you can make sure they don’t approve anything they are not ready to approve. Cross out the word “Approval” in the title of the document, and cross out any language in the body saying the buyer “approves the report.” That way you protect your client’s contingency rights and keep them as long as necessary.
As an aside, you should know that, as of today, Pickford Escrow has no documents that include approval language. They will only send your clients receipts. As a result, when you use Pickford, you can be sure they will not cause this problem for you or your client.
As always, please contact your manager if you have any questions and they will get the Legal Department involved if necessary. Thanks
February 21st, 2013 at 7:36 pm
As you know, when possible we like to share the stories of lawsuits that have been filed against the Company and our agents.? Often, those stories can help us avoid similar problems in the future.? In a recently settled case, we represented the seller of a $2 million property in Los Angeles.? The buyers were the music producers of the television show “Glee,” and planned to make significant modifications to the property, including turning the garage into a music studio.? As a result, any prior work done to the property, and whether that work was done with permit and to code, was of great interest to them.
Given that issue, in the seller’s disclosures, we tried to ensure that she gave all relevant information to the buyer.? In her TDS, the seller stated that there were modifications made without permit and not to code.? In her explanation of that disclosure, the seller identified a wall that was added to one of the property’s bedrooms.? That was all the seller disclosed in this regard.? Additionally, however, our agent disclosed that the garage at the property had been converted without a permit.? In this case, that was all our agent knew and therefore all she could disclose.
Furthermore, because of the buyers’ interest in this issue, the Purchase Agreement provided that the seller would deliver all plans for work performed at the property to the buyer.? Our agent also promised to provide the buyer with permits.? As a result, our agent went to the Department of Building and Safety and filled out a form asking for all permits and documents related to the property.? Upon returning to her office, however, and discussing the transaction with a colleague, our agent was told that we do not provide permits.? She was reminded that the Civil Code specifically says that our inspection duties do not include an inspection of public records and, therefore, if the buyer wants permits, they need to go to the City themselves.? As a result, when she was notified that the permits were available, our agent did not pick them up and never provided them to the buyers.? Therefore, when escrow closed, the buyers were not aware that the documents showed significant additional work done without permits and that numerous stop orders had been issued regarding work started by the sellers.? As a result of these conditions, the buyer was required to bring the entire property up to code before making their own renovations.? According to plaintiffs, the extra costs exceeded $1.2 million.
Of course, a lawsuit against Prudential, the seller and the buyer’s agent followed.? The claim against Prudential related specifically to the permits, and the fact that our agent took it upon herself to provide them to the buyer.? While it is clear that we had no duty to do so, the plaintiffs argued that by going to the City and requesting documents, our agent assumed the duty to provide them to the buyer and her change of course, and failure to pick the permits up, constituted a breach.? The case was recently resolved for a 6 figure settlement.
So, what is the lesson from this case?? First, do not go to the City to pull permits.? As? I stated above, the Code specifically says that we do not have to do so.? If your buyer wants permits, refer them to the City themselves, or to a company that will pull them directly.? By getting a third party involved, we avoid the responsibility that what we provide may be incomplete.? In the worst case, go to the City with your client, but let them request the documents.? That way it is their responsibility, not ours.? Next, however, you need to remember that if you accept a greater duty than required, you need to perform it competently. If you go to the City to get permits, you need to be sure that you deliver what you get to the buyer.? If you get an extra inspection report regarding some system, you need to be sure to turn it over.? You cannot go half way, or decide in the middle of performing a job that you shouldn’t have started it in the first place.? Once you start doing something for a party, do it completely and do it well.? That way, no one can argue that you breached a duty you voluntarily assumed.
As always, please contact your manager with any questions you may have and they will get the Legal Department involved, if necessary
February 15th, 2013 at 7:34 pm
As you know, we have spoken a lot recently about how to deal with today’s market, when many properties are going in multiples (a house in Westwood had 52 offers last week) and buyers are having a very difficult time getting their offers accepted. I have gotten phone calls about buyers waiving all of their contingencies or going directly to the listing agent to increase the likelihood that their offer gets accepted. I have heard of buyers offering short escrows, or waiving the loan contingency, and I have heard of them offering extra compensation to the listing agent. These offers all have their own issues, which we have talked about in past blog posts, but they are very prevalent and need to be handled correctly. With that in mind, at a Legal Update I did in Orange County this week, our discussion led me to clarity on which offers are appropriate and which, at a minimum, create additional issues and difficulty.
In short, I realized that when considering a certain structure to make your offer more attractive, you need to ask yourself one simple question: Who am I trying to incentivize by structuring my offer this way. In other words, when my offer waives all contingencies, who am I trying to attract? When I go directly to the listing agent and ask him to write my offer, who am I trying to attract? If the answer to that question is the seller, then with appropriate advise to your buyer as discussed in our January 18 blog, your offer is fine. If the answer to this question is the listing agent, on the other hand, then we have issues to consider. After all, by making an offer attractive to the listing agent, you are not really addressing the relevant question: Is your offer the best for the seller. As you know, the asset being sold is the seller’s and the offer that is accepted should be the best one from the seller’s perspective. If, however, I write an offer that means more money to the listing agent, does that necessarily mean it is best for the seller? Of course not. As a result, when writing such an offer, one that incentivizes the listing agent rather than the seller, I am working under the assumption that our listing agent is willing to ignore his duties to the seller and steer him to an offer that benefits the agent rather than the principal. As a result, if the goal of our offer’s structure is to benefit the listing agent only, we are encouraging his breach of duty and not doing anything that should benefit our buyer.
Now, I know that in the real world, these offers work. Many listing agents are happy to benefit themselves without considering their clients. So I discuss this issue with you merely to highlight the potential breach of fiduciary duty involved and remind you that, when representing a seller, you should not get involved with these types of contracts. Your duty is to negotiate the best deal for your seller. At that point, when offers come in, your financial interest in the deal is already settled. You have an enforceable listing agreement.
As a result, please remember what our goal is: to get the best deal we can for our client. When we keep that goal in mind, we will remember to incentivize the seller and not the listing agent and, by doing so, we keep ourselves from breaching any duty to our client.
As always, if you have any questions on this issue, please bring them to your manager who will contact the Legal Department if necessary.
February 9th, 2013 at 7:32 pm
I got a couple of calls this week that are not too difficult to deal with, but have been very common over the years. As a result, I thought it a good idea to share them with you.
1. The first question normally goes something like this: “My seller is really the child of the person who has owned and lived in the property for the past 30 years. The parent has passed away, and the child is now the individual seller, so I need to do a TDS. Unfortunately, the child has not lived in the house for 20 years and knows nothing about its condition. What do I do?”
The main thing to realize in this situation is that a TDS does not require you to actually know things about a property. It just requires you to disclose what you know. So, in this case, you should have your seller (the child) fill out the disclosure forms as completely as possible. They invariably have some information, like the features of the property, and complete that portion of the form. Then, in the blank lines, have them write that they have not lived in the house for 20 years and therefore do not have the information of a normal seller. In this way, your seller is telling he buyer what they are and are not getting and, more importantly, is complying with his legal obligation to disclose everything he knows. In some deals, the seller will pass away after they have signed your listing and after they have completed an original TDS, but before the house is sold. In that case, turn over the deceased seller’s disclosure, as well as one prepared by the heir. That way we again make sure to cover all of our bases.
2. The next question I got is a little different twist on the disclosure issue. In this case, we are already in escrow and have delivered all the disclosure documents to the buyer of record. They have reviewed those documents, signed them and returned them to our seller. And then, in the last few weeks of escrow, the contract gets assigned to a new buyer. Of course, in this case the question becomes what do we have to do to make sure that the new buyer/assignee gets the appropriate disclosures.
In this case, it is possible to argue that nothing needs to be done. After all, as assignee the new buyer theoretically steps in to the shoes of the original buyer at the time of the assignment. As a result, since buyer no. 1 saw and approved the disclosures, it is arguable that the new buyer is bound by that approval. That being said, given the fact that most of our lawsuits still arise from disclosure issues, we believe you should do more. Rather than rely on the original buyer’s signatures, take out all of the disclosure documents delivered to buyer no. 1, list them on a separate document and write the following at the bottom: “Received and approved by [buyer no. 2/assignee’s name].” Then have the new buyer sign on the bottom of the page, put it in your file and you are fine. You do not need to have buyer no. 2 sign each disclosure individually. This type of catch all is fine in this circumstance.
As always, plese contact your manager if you have any questions and they will get the Legal Department involved if necessary
February 2nd, 2013 at 7:31 pm
As you know, a few weeks ago we did a blog post regarding the Demand to Close Escrow (DCE) and its proper use. While most of our posts result in some questions from you to your managers, this one created more buzz than usual and a couple of consistent questions that I thought were worth discussing.
First, we were asked numerous times whether the DCE can be give before the scheduled close of escrow date, or whether you have to wait until that date to give one. The answer to this question can be confusing since the documents available to answer it seem to contradict themselves. First, in the DCE itself, in paragraph 1B, close can be demanded for a certain date which is “at least 3 Days After receipt of this Demand to Close Escrow but no earlier than the agreed upon Close of Escrow date.” This last clause, of course, implies that the DCE can be given before the scheduled close date. In the Purchase Agreement, on the other hand, in paragraph 14E states as follows: “Before Seller or Buyer may cancel this Agreement for failure of the other party to close escrow …” on time, they must give the DCE. Of course, since the only way to know whether the other side has failed to close on time is to wait for that date, then this clause implies that you should wait until the scheduled close of escrow, at the earliest, to give a DCE. So, which is it: before or after. In our view, the better answer is to follow the RPA and wait until the scheduled close date before giving a DCE. First, the only agreement between buyer and seller is the RPA, not the DCE. So, in our view, it should govern. Further, it is also true that you can never be sure if someone will not close on time unless you give them the chance to do so. So you cannot give a notice for “failure” to do so without waiting. While we may have a lot of hints that the other side will be late, and while we may be proven right most of the time, there are instances where things change and we are surprised. So be safe and wait. At that point, no one will be able to attack your DCE as having been improperly served.
Next, a number of questions related to the situation where you get to the scheduled close of escrow and the buyer’s contingencies have not been removed. In that case, I was asked, do you first need to give a Notice to Perform and let that time run before giving a DCE. The answer here, in my mind, is much simpler: You can immediately give a DCE. I say that because it is not necessary for any contingencies to be removed for the escrow to close. In theory, you can let them all run through the escrow and still close as scheduled. While as a seller’s agent you should never do that, it is possible pursuant to the contract. So, if you get to the close date, and the buyer is late, your seller may give a DCE and ignore the open contingencies. The buyer has an independent duty to close as scheduled.
As always, please contact your manager with any questions they may have. Your manager will, of course, contact us when necessary.
