September 22nd, 2012 at 7:13 pm
As you know, given the economy of recent years, it has become more common for us to see transactions involving the Bankruptcy Court. Most commonly, our seller has filed bankruptcy in order to delay a foreclosure or stop some legal proceeding against him, and the property we have been asked to sell is now subject to Bankruptcy Court jurisdiction. While I do not want to go into too much detail about what this means, there a couple of warnings I would like to pass on. First, as with any property subject to a court proceeding, selling a property in bankruptcy is much more complicated than the normal deal. For example, after a bankruptcy is filed, the court appointed trustee can disavow any of the debtor’s (usually the seller) contracts. So, the trustee can terminate our listing agreement and hire a new broker. She can also disavow a purchase agreement that the seller has already signed. So, the most important thing for you to remember with a property in bankruptcy, is to be in contact with your client’s bankruptcy attorney or the bankruptcy trustee and follow their instructions. They will tell you who needs to approve any action you take, and what sort of court proceedings will be necessary. And remember, all bankruptcy issues are legal so you should not be advising your client concerning those questions. Always have the client consult with their attorney.
Next, I wanted to warn you about what happens when a debt is “discharged” in bankruptcy and specifically how such a discharge will affect the typical real estate transaction. In a few transactions we have had recently, our seller’s debt to a lender was discharged by the Court. Based on that discharge, our agent believed that the property could be sold without dealing with that “discharged” lender. Of course, when the title report was ordered, that lender’s lien was still shown. So the question arose whether the “discharge” eliminates the lien or not. After much research, we discovered that even with the discharge of a debt, a lien against the property still remains in place. As odd as that may sound, the discharge eliminates the debtor’s personal liability for the debt. In other words, the lender cannot sue the borrower for repayment. However, when the debt is also supported by a lien against real property, the lien continues after bankruptcy and must be paid off at sale of the property.
So, if your client tells you not to worry about their mortgage because the debt has been “discharged,” tell them you believe it still exists as a lien and send them to their lawyer for advice. More importantly, don’t be a bankruptcy expert. In almost all instances, a client in bankruptcy will have a lawyer who you can use for direction. That lawyer becomes a great resource for you and can make sure that you handle things right and make no mistakes in your transaction. And, of course, that is what we all want.
As always, give a call if you have any questions
September 21st, 2012 at 7:12 pm
While it is our goal in the legal department to never have our company and our agents involved in litigation, sometimes it happens. At the end of a trial, a jury will be provided with a series of instructions on how to apply the law. These instructions guide the jury in the deliberation process. While we all know that a real estate broker must disclose to his or her client all material information that the broker knows or could reasonably obtain regarding the property or relating to the property, recently, a separate jury instruction was adopted which is specifically directed at the duty of disclosure by a real estate broker. This instruction states that “the facts that the broker must learn, and the advice and counsel required of the broker, depend on the facts of the transaction, the knowledge and experience of the client, the questions asked by the client, the nature of the property, and the terms of the sale”. The instruction goes on to state that the “broker must place himself/herself in the position of the client and consider the type of information required for the client to make a well-informed decision”.
So does this expand the real estate agent’s duty to disclose beyond what traditionally has been “disclose what you know or reasonably should know”? The simple answer is probably yes because an agent must now consider each client individually and relay information which is fine tuned for that client. In reality, what we are suggesting is that you continue to disclose what you know or should reasonably know by being observant and by thinking would I want to know this fact if I were purchasing this house. Remember if you are questioning whether you should disclose or not, be conservative and disclose it. I can’t recall one case where we were sued for over disclosing.
As always, if you have any questions or comments, please contact the legal department.
September 14th, 2012 at 7:11 pm
As you know, every few months we like to share true stories about disputes or litigation we have been dealing with. In today’s case, we represented the seller in the sale of his property. The property had many beautiful and unique features, including a large stable that allowed for the boarding of up to 10 horses. At the time of our listing, the seller had leased the stables to a woman who was operating a riding school at the property. According to our seller, the school had been there since before he bought the property and had operated continuously for as long as he knew of the property. When the property was shown to potential buyers, we made no representation about the business. We, of course, identified the large stables, but said nothing about what use could be made of them. On the other hand, whenever we showed the property to anyone, including the ultimate buyer, the riding school was in operation and we let all those buyers watch the lessons and believe that the business could continue after their purchase. In truth, everyone involved, including our agent, the buyer and the seller, believed (assumed) that the riding school was legal and nothing to the contrary was said to anyone.
Of course, after close of escrow, a government official visited the property and told the buyer that the zoning prohibited the operation of the business. It turns out that a neighbor had complained about the business three years earlier, and two and a half years before our transaction, and it took that long for the county to get around to the complaint. We tried to get a variance to allow the business’s continued operation, but the county said no. So, we were left with a lawsuit for misrepresentation and non-disclosure. Given that the alleged fraud related to a business, this case was very expensive to settle.
So, what is the lesson of this story? The main thing is that old lesson we learned as children: Do not assume anything. While I would not have wanted our agent to confirm the zoning of the property, or make any representations about the business, when the facts on the ground make a representation of this nature, that an operating business was legal, and we don’t know if that is true, we need to explain our lack of knowledge to the buyer. We cannot allow the “implied” representation of the condition’s existenceto be accepted by a buyer. Tell the buyer you don’t know if the business is legal, or if the structure is legal, and recommend that they check if they would like. That simple statement, which is obviously true, avoids the problem and, most importantly, avoids the expensive lawsuit.
As always, contact us with any questions you may have
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
