September 7th, 2012 at 7:10 pm
As you know, in today’s marketplace, close of escrow is more of a moving target than ever before. Loans are hard to close, lenders do review appraisals and buyers are conducting more inspections than ever. All of these things make buyers more hesitant to remove contingencies and, as a result, make sellers more hesitant to move out. In order to address these concerns, we are seeing more lease backs than ever. By agreeing to the leaseback, we let the buyer conduct their due diligence while allowing the seller to be comfortable that the deal is going to close before they move. Of course, this comfort comes with risk since the lease back creates a full landlord-tenant relationship between the parties. In most cases, the contract defining that relationship consists of one line: “Seller to lease back Property for x days at buyer’s PITI.” That is it. Unfortunately, this language fails to deal with many things that come up in the course of a landlord-tenant relationship. For example, if the above constitutes your entire lease, does the buyer/landlord have a security deposit to look to should the property be damaged during the lease back period? Probably not. Under the language above, who is going to pay for utilities or repairs now that the buyer owns the property? Who is going to pay for insurance? Frankly, I don’t know. What condition does the seller need to leave the property in when they vacate? And, is the buyer/landlord entitled to enter the property, or have a key to it now that they are the owner? Again, these issue are not dealt with by our one line contract, so the answer is unknown and ambiguous.
Of course, and as you know, when a contract insufficiently defines the parties rights, it merely asks for conflict. In this case, since you are the ones drafting the contract, you will be blamed for any conflict and will be asked to make it right, usually with money. So, what can we do to avoid this problem? In truth, it is very simple: For a lease of less than 30 days, use paragraph 2 of the Purchase Agreement Addendum (Form PAA), and for longer leases use a Residential Lease After Sale (Form RLAS). Both of these documents deal with all of these issues and define the parties obligations as clearly as possible. They constitute a full lease covering all of the important landlord-tenant issues. More importantly, they are not custom clauses drafted by you. They are CAR forms. As a result, you cannot be blamed for their terms. So please use one of these forms in every lease back you do. It will better protect your client, and keep you out of trouble at the same time.
As always, contact us with any questions you may have.
August 31st, 2012 at 7:10 pm
Throughout the course of my career, getting paid on lease renewals has always been a troublesome problem. After all, while we always get paid on the original lease, the renewal takes place usually one year later and we have not been involved in a direct way for that period of time. Further, there is no escrow involved so we cannot use them as protection. When we represent the landlord, and have a Lease Listing Agreement, the legal basis for our claim is very straightforward. Paragraph 3A(1)(b) reads as follows: “Owner agrees to pay Broker additional compensation of ______ if a fixed term lease is executed and is extended or renewed. Payment is due upon such extension or renewal.” So, if you remember to put a number in the blank, the landlord is contractually obligated to pay the commission and we have a very easy claim.
But what happens if we represented the tenant? Well, the Listing Agreement is of no help since it is between the listing broker and the landlord only. In truth, our agreement to get paid on the lease is normally not in a written contract, but is rather through the MLS with the listing agent only. So, the first question is whether the offer in the MLS mentions anything about renewals. I have done a quick, random survey of three of our MLSs and have found them inconsistent in this regard. Two of the three have no field for lease renewals. They only have the “CSO” field, but nothing else. So in those MLSs, it is unlikely that the listing broker’s offer includes a renewal commission. In another one of our MLSs, however, there is a specific filed labeled “Renew/Purch Comp.” This mandatory field allows for multiple answers, such as “Commission on first year only,” “Not on renewal” and others. So, the first thing to do when representing the tenant is to check your MLS and see if they deal with commissions on renewals.
If your MLS does not deal with this issue, or if the property you are looking at does not make an offer including renewals, then what can you do? Obviously, in order to collect a renewal commission, you need an agreement with someone to have it paid. The easiest way to accomplish this is to have either the landlord or tenant sign a Lease/Rental Commission Agreement (Form LCA). This form specifically provides for payment of a commission if the “Lease or Rental Agreement is extended or renewed…” So, the LCA protects your commission on a renewal.
So, remember to deal with this issue when representing tenants. First, check your MLS. If the offer of the listing agent does not deal with renewals, then you need to get an LCA signed. If not, you need to understand that collecting a renewal commission may be impossible.
As always, please contact us with any questions you may have
August 24th, 2012 at 7:09 pm
As you know, in our improved market where with low inventory, it is not unusual to see multiple offers on a well priced property. In that context, we are seeing many situations where our listing agent and seller are being forced to decide whether to rescind a previously issued counter offer. For example, last week we had a deal where, on the first day the property was in the MLS, we received an offer that our seller wanted to counter. Once that counter was sent to the buyer, however, a second offer came in. The question then became how to handle this situation in a way to both protect the seller legally and keep buyer no. 1 interested in the property. After all, once we issued the original counter offer to buyer no. 1, they now had control of the transaction. They could create a contract merely by accepting and delivering the counter back to the seller. So, we wanted to change that situation, and give the seller control of the process, while keeping the buyer interested.
In these cases, unfortunately, the first thing you have to do is protect your seller legally. As a result, you need to create a writing, by e-mail or otherwise, informing the buyer that the counter offer is being rescinded. Once you send that rescission, the buyer no longer has the ability to create a contract because he has no viable offer in his possession. Remember that any offer can be rescinded until it is accepted and delivered back. It does not matter how long the buyer has had it or how long the document says it will remain open. Any offer can be rescinded until acceptance. So, rescind IN WRITING. If you don’t, and instead call the buyer’s agent, they will have their client sign and return the counter. And then, of course, you will have the fight of which occurred first, your phone call or the acceptance. So, avoid the problem and rescind in writing. (Your e-mail should say something like this: “Counter Offer No. 1 regarding [property address], made by seller to buyer on [date], is hereby rescinded. Multiple counter offers will be issued by seller to buyer shortly.” )
After your e-mail is sent, however, you should return to salesperson mode. Call the selling agent, tell them that the rescission is in the e-mail, but that multiple counter offers are also on their way because a new offer was received. This phone call will soften the blow of the rescission and explain why it was done. It will assure buyer no. 1 that you are still interested in them and want them to continue their efforts to buy the property. The phone call is just a nice personal touch at a time when you are forced to do something some may see as a little too “legal.”
So do both. Rescind in writing first and then call to explain. That way you protect your seller and allow them to take advantage of the multiple offer situation while assuring all buyers that they are still strongly being considered for the property. And, as importantly, you ensure that the property is not being sold twice. And that is always a good thing.
As always, give us a call if you have any questions.
August 17th, 2012 at 7:09 pm
As you know, with our market improving, we have seen an increase in multiple offers. In the course of these transactions, we have had a number of instances where multiple buyers believe they have an enforceable contract for the same home. For example, this week we have been dealing with a dispute involving the following facts, occurring in the following order: (1) Buyer No. 1 made an offer for the property; (2) Seller countered to Buyer No. 1; (3) Buyer No. 1 signed counter no. 1 and returned it to his agent; (4) The selling agent did NOT return the signed counter to our listing agent; (5) Buyer No. 2 made an offer for the property; (6) The seller, through our listing agent, rescinded the original counter to Buyer No. 1 and reissued a multiple counter offer; and (7) Buyer No. 1 returned the signed version of counter offer no. 1. Buyer No. 1 now claims that he has a contract for the property and the seller wants to sell to Buyer No. 2. Of course, this dispute is answered by a very simple question: Was counter no. 1 rescinded before Buyer No. 1’s signed acceptance was returned to the listing agent. After all, acceptance requires Buyer No. 1’s signature and delivery back to the seller, and the seller was entitled to rescind until that acceptance was received. Since all these documents were sent by e-mail, I asked to see them so the timing of each step would be clear.
In response to my request, I received scanned copies of the e-mails which had been printed out and placed in the transaction file. I was not forwarded electronic versions of the e-mails themselves. When I asked why that was the case, I was told that our agent had a policy of printing out business e-mails, putting the hard copy in the file and then deleting the electronic version. Now, don’t get me wrong, I love the fact that hard copies of the e-mails and attachments were in our file. That is what you should be doing to maintain a complete file in these days of electronic communication. Additionally, however, I believe you should keep all e-mails sent and received in the course of your business. As you can see from the example above, e-mails are often central to explaining what happened in a transaction or to our defense of a claim against us. While putting a hard copy in the file is often good enough to provide the protection needed, maintaining the electronic copy is also smart for various reasons. First, a hard copy file, or more commonly, a single piece of paper, can be lost or destroyed. Therefore, having the electronic version is a good backup. Furthermore, finding an e-mail is often much easier than finding a hard copy. If we have an issue with a particular property, all you have to do is search your e-mail for that address and you will most likely find what you need. To get the hard copy, we first have to retrieve the file from storage and then manually search through it. Again, while maintaining a complete file is needed, the e-mail backup can only help make our search easier.
So, don’t delete any business e-mails. Instead, after you print them out and put them in the file, move them to your archive folders. Those folders can be organized however you want (by deal, by year, etc.) and do not affect the use of your main inbox. And, of course, they can easily be searched. That is exactly what I do and I can’t tell you how often I have been able to find an important e-mail from years ago. So please, don’t delete anything. Archive instead.
As always, let us know if you have any questions
August 13th, 2012 at 7:08 pm
I was at our Los Feliz Office last week for a Legal Lunch and Learn and we were discussing one of my favorite subjects: Managing your client’s expectations. As you know, we feel very strongly that if you properly counsel your client about their transaction, you will avoid most problems since they will not have false expectations about the deal. In the course of our conversation, our agents shared some of the things they talk to clients about and I thought two of them were brilliant, and worth sharing.
First, when representing a buyer, one of our agents always tells the client not to use or open any new credit after an escrow is opened. That new credit may negatively affect the buyer’s chance to get a loan and therefore make your deal harder to close. This advice was emphasized to me when later in the week I got a call from a buyer’s agent who had this very problem. After opening an escrow with our agent, the buyer then went out and bought a new car. Of course, that purchase was financed and, when the mortgage lender found out about the car loan, problems arose. The only way the buyer could qualify for his new mortgage was to pay off the car loan immediately and close out that new credit account. As a result, he had to borrow $12,000 from family, pay off the car and then close his real estate deal. So please talk to your buyers about this. They don’t know about these problems without your help.
Next, when representing a seller, another agent shared that they always tell the seller that no matter what the contract says, close of escrow is a “floating” or “flexible” date and often does not occur when scheduled. By having this conversation, our agent prevents a real problem of disappointed expectations, where the seller thinks the closing date is a guarantee, plans around it and then is stuck when there is a delay. Again, I recently saw this in concrete terms, where a seller demanded money from us for a late closing. This seller kept telling us that “the contract says what the contract says,” and therefore the buyer was in breach. He wouldn’t listen to anything we had to say. So to avoid the problem, and close the deal, we had to compromise on his demands. As a result, please tell your sellers that, while you will do everything possible to close on time, it sometimes doesn’t happen. Tell them that loans are hard to get and take a long time. Tell them that repairs may take longer than expected, or that the buyer could get cold feet and even breach the contract. Make sure they understand that is why the buyer has contingencies, because nothing is definite. By counseling the seller in this way, you will prepare them for all eventualities and will not have to deal with the disappointment if something happens.
In short, by counseling on these two issues, you can take easy steps to avoid problems with your deal and client. And, of course, we know that is your main goal.
As always, let us know if you have any questions.
