REVISITING THE WPA – AVOIDING OLD PROBLEMS

As you know, the Wood Destroying Pest Inspection and Allocation of Cost Addendum (CAR Form WPA) has been part of our world for a number of years. Despite that fact, and the fact that it is used in the vast majority of our transactions, we continue to see numerous issues arise from its use. As a result, we thought it a good idea to remind you of the common WPA issues and, more importantly, how to avoid them.
1.     The first issue we see revolves around what termite company the seller wants to use to do the section 1 work. As you know, it is not uncommon for the seller to choose a company to do the termite report that the buyer is unhappy with. In such a case, the question becomes whether the seller can choose whoever they want, or whether the buyer has some input. The answer to that question starts in the WPA itself. In paragraph 2A of the form, the parties agree who is going to pay for a “Wood Pest Report prepared by ___________.” Notice that the term Wood Pest Report is capitalized. That means it is a defined term and whenever it is used in the document, it refers to the Report prepared by the company in the blank. Of course, in 2C, where we typically say that the seller will pay for section 1 work, the WPA says the work they will do is that “described in the Wood Pest Report…” As a result, when the seller agrees to do section 1 work, they are obligated to do the work called for in the specified company’s Report. Now, in most cases, agents fill in the above blank with the term “seller’s choice.” While that is legally sufficient, understand that what it really means, since the seller is making the choice, is the cheapest report. So, the way you fill out the blank is very important. If you want the seller to use a particular company, you need to put its name in the blank.

On the other hand, as the buyer’s agent you should remember that, even if the seller can decide who will do the section 1 work per the WPA, you can still ask for someone else as part of your investigation contingency. The RPA specifically defines your investigation contingency to include pest control issues. So, while the seller is not obligated to use your inspector or do extra work, you can ask and threaten cancellation. As a result, if a company is specifically named in 2A of the WPA, the seller is obligated to do the work that company identifies. With regard to any other company, or any additional work, you can only negotiate their involvement as part of your contingencies.

2.     Next, on the seller’s side, our main issue is when the section 1 work is more expensive than they expected. After all, as we said above, when the seller agrees to do section 1 work, they are obligated to do whatever the specific Report says. So, how do we protect our seller? First, you can get the Report up front and insert the companies name as the controlling termite company in either the WPA or a counter offer. That way, you have the report, you know what section 1 will cost, and are only obligated to do that work. The other way to protect your seller is to counter the offer with the following language: “Seller to pay for section 1 pest control work up to a maximum of $x. All costs above that amount to be dealt with pursuant to paragraph 14.” In other words, the seller will pay for the identified amount, but any extra cost will be negotiated as part of the contingencies. By doing either of these things, the seller knows what they are obligated to pay and anything else is negotiable. You are not having them write a blank check.

So, while this is basic advice, it is very important. Please make sure all WPAs you draft deal with these issues so your client is properly represented and you don’t get hit by a claim when they become unhappy.

BE CAREFUL WHAT YOU SAY ABOUT CANCELLATIONS.

I got a call this week that is unfortunately all too common. In this case, we represented the buyer and an outside broker had the seller. Our buyer did all his due diligence and inspections and, after some negotiation and a credit from the seller, removed all his contingencies but loan. A few weeks later, with the loan application still pending, our buyer changed his mind and decided he wanted to cancel the deal. Without our knowledge, he wrote an e-mail, with a copy to the listing agent, asking for the cancellation and explaining and why he wanted out. That explanation related to a number of property conditions, including traffic in the neighborhood and alleged defects. He did not say anything about his loan.

Of course, when the seller was asked to sign a cancellation, they balked. The seller stated that the buyer’s e-mail made clear the cancellation was based on property condition and not on anything else. As a result, because the investigation contingency had already been removed, the seller said they were going to keep the buyer’s $50,000 deposit. Now, after all that, the buyer’s loan actually got denied, and the buyer is trying to use that contingency to get out. As you can imagine, the seller is skeptical, believing that the buyer asked the lender to deny the loan or, at a minimum, that the buyer did not cooperate in trying to get the loan approved and therefore acted in bad faith. Therefore, he is still refusing to return the deposit.

So, what is the lesson of this story? Obviously, you must think long and hard before telling a seller why you are cancelling the deal. You must review the contract and determine what contingencies and cancellation rights still exist. At a minimum, you have to make sure that your explanation fits within one of those contingencies. In truth, the Cancellation of Contract form (CAR Form CC) does not require you to identify what contingency you are using to cancel. The most common paragraph used when exercising a contingency would be paragraph 1E of this form, which reads that the cancellation is being made “As otherwise permitted by paragraph _____ of the Agreement.” In completing the clause, you can merely put “14” in the blank, thereby identifying the general contingency clause in the Purchase Agreement. That way, you don’t identify any particular contingency and then only have to do so if asked by the seller. Of course, that question lets you know you have to be careful, and you can talk to your manager or the legal department to determine how best to fit your cancellation within your remaining contingency rights. By not identifying any particular clause, you give yourself options and freedom, and don’t tie yourself down if things change at a later time.

So cancel carefully and only identify a cancellation right when you have to. That way, all available options will be open to your buyer and you will have a better chance to get their deposit back.
As always, contact us with any questions you may have.

THE SHORT SALE ADDENDUM: A COMPLICATED BUT IMPORTANT DOCUMENT

Given the number of short sales we see, the Short Sale Addendum (SSA), is one of the most important documents we use. Unfortunately, it also one of the most complicated and most misunderstood. As a result, I thought it a good idea to walk you through the way it works so you can properly explain it to your clients.
As you know, the SSA’s boilerplate language provides that the transaction is contingent upon receiving lender approval within 45 days of acceptance. It then provides that, if the (1) seller has not received the lender’s approval by that date, or (2) the buyer has not received a copy of that consent from the seller by that date, the contract may be cancelled. It specifically provides that “[i]n either case, Buyer shall be entitled to return of any remaining deposit…” The main question that arises in this context is whether the contract can be cancelled before day 45 if, for example, the buyer finds another property or the seller changes their mind and wants to seek a loan modification. The technical answer is no, since until that “Short Sale Contingency Date” arrives, there is no cancellation right. That right is specifically created only if approval is not received by that date.

In truth, this issue cannot be read independently of paragraph 2 of the SSA. The boilerplate of that paragraph provides that the time periods for buyer’s inspections do not begin until after bank approval is received. Of course, we know that is the way most contracts are written because buyers do not want to spend money on inspections until they know that the bank has approved the deal. However, by leaving those terms in place, it means that, technically, your buyer has no cancellation rights until either approval is received or the 45 days passes. After all, the SSA explicitly says he doesn’t have the short sale contingency until day 45 and, if the inspection periods haven’t started, he doesn’t have those cancellation rights either. So, the only way to fix this is either shorten the short sale contingency date in paragraph 1A or check the box in paragraph 2(ii) which makes your inspections begin at acceptance. In those cases, cancellation rights will start earlier and can be used if necessary.

Of course, even if you leave the boilerplate, a conversation with the listing agent should still get you out of the deal if you want. After all, while the seller can hold you in for the time being, you will be able to cancel on the short sale contingency date if approval is not received, or based on your inspections if it is. So, the fight seems silly, but we wanted to explain this because it has been coming up.

The other issue we see with regard to this form is the question of what happens when the bank asks for changes to the Purchase Agreement. As you know, the lender’s approval typically comes with a term sheet that may not be consistent with the parties’ agreement. In this case, the SSA is very clear: “[N]either Seller or Buyer is obligated to change the terms of their Agreement to satisfy Short Sale Lenders’ consent or term sheet(s).” (SSA, paragraph 1E.) As a result, in the common event that the bank asks for changes, even if they are minor, another cancellation right arises. The parties already have an agreement, subject to lender approval, and are under no obligation to change it just because the bank asks them to.

As always, let us know if you have any questions about this document.

USING ELECTRONIC SIGNATURES DOES NOT CHANGE YOUR DUTIES.

As you know, we believe that electronic signatures are the future and, as importantly can be very useful for your business. Products like DocuSign and Digital ink make it easier for you to get your client’s signature no matter where they are. They allow a transaction to move forward more quickly and ensure that copies of signed documents are not misplaced. All in all, we think they are a good thing and strongly recommend that you use them as soon and as often as possible.
On the other hand, however, we are hearing that because of the way DocuSign works, it is becoming more common for documents to be signed by your clients without being read or explained by the agent. As you know, the systems make it very easy for clients to move from signature block to signature block without reading anything in between. If the agent doesn’t ensure that the documents are read by or explained to the client, then when a problem arises, we will invariably hear the “I didn’t read it and would never have agreed to that” excuse. This exact scenario has come up no less than 5 times in the last month.

While I don’t believe saying that “I didn’t read the document” is an excuse for your client, it does point out a problem in our practice. First, as a legal matter, it is your obligation to ensure that your client reads and understands what they sign. As a result, even if you use electronic signatures, which we believe you should, you need to still go over the documents with your client. Of course, there are many ways to do this. As I have said many times, some agents go over all the documents at the beginning of their relationship with a client, like when they get a listing signed. That way they can tell the client what is coming and set the appropriate expectations. Others, especially in the case of electronic signatures, go over the documents on the telephone and emphasize, in an e-mail, that the client needs to read everything before he signs. However you do it, you need to recognize that your obligation to guide and give advice to your client has not changed because they can sign documents electronically.

Furthermore, and more importantly, your business is all about relationships. It is those relationships that make your deals easier to close and results in the referrals that you need to succeed. As a result, meeting with your client to show your expertise and go over documents should be seen as an opportunity, not a burden. By explaining things professionally to your client, you are advertising your expertise, and making them realize why they hired you and why they should hire you in the future. This time with your client can be priceless if used correctly. So, keep up with technology and use electronic signatures. There are many good reasons to do so. At the same time, however, don’t forget to go over all documents with your client. Not only is it your legal obligation, it is one of the best marketing opportunities you have.

As always, let us know if you have any questions.