April 13th, 2012 at 6:55 pm
As you know, in most deals it is common for the seller to purchase a home warranty for the buyer. The policy covers many of the property’s systems and, by paying for repairs, can save everyone headaches after close of escrow. On the other hand, if not dealt with correctly, the contract terms around that warranty can be a problem. Specifically, paragraph 4D(6) of the Purchase Agreement deals with the allocation of costs for the home warranty. That clause reads that either the buyer or seller “shall pay the cost, not to exceed $___________, of a one-year home warranty plan, issued by _________________, with the following optional coverages:” The contract then has 4 checkboxes for optional coverages: air conditioning, pool/spa, codes and “other.” As you know, the disputes we see arise from the interpretation of this clause, and more particularly, how you fill it out.
For example, we have a deal where paragraph 4D(6) provides that the seller shall pay the cost of the warranty, “not to exceed $600.” The buyer only checked the box for one optional coverage, air conditioning. As a result, escrow ordered the policy, with optional HVAC coverage, for a total cost of $400. Two days before escrow was to close, the buyer’s agent called escrow and said they also wanted optional roof coverage at a cost of an additional $100. In other words, with that extra coverage, the seller would still be paying less than their “not to exceed” amount of $600. Is the seller obligated to pay for the roof coverage?
The answer to that question, quite simply, is no. The $600 “not to exceed” amount specifically refers to a one year policy with “the following optional coverages.” Since roof coverage was not indicated in the contract, it was not a “following” coverage. Further, since the $600 is a “not to exceed” amount, the seller is not obligated to pay that full amount. Rather, they are just not required to pay more than that amount. On the other hand, if the seller can provide the buyer with what they asked for in the contract, in our case a one year policy with HVAC coverage, for less than $600, they are free to do so and have properly performed the contract.
So what does this mean for the buyer’s agent? It means you need to be sure to designate the optional coverages you want. The way the contract is written, the “not to exceed” amount will not protect you if you don’t ask for the proper coverages. So, when you represent the buyer, talk to them about the condition of the house and the optional coverages available, and make sure to check the box for all coverages they want. That is the only way to make sure your buyer gets the warranty they bargained for.
As always, please contact us with any questions you may have.
April 11th, 2012 at 6:55 pm
As we all know, a seller has an obligation to disclose to the buyer, facts materially affecting the value and desirability of the property that are known only to him and not within the diligent reach of the buyer. When the listing agent becomes aware of these facts known by the seller, the agent owes the same duty to disclose. When we think of these disclosures, we generally think of matters related to the physical condition of the property. But the question has been raised as to whether an agent has a duty to disclose facts related to financial aspects of the transaction.
In 2010, a lawsuit was brought by the buyer of a property against a broker for negligent misrepresentation including failure to disclose. The facts of the case involved a buyer who had an accepted contract with a seller in the amount of $749,000. Absent from the contract was the crucial information that the seller had encumbered the property with three mortgages totally $1,141,000. This information had not been relayed to the listing agent at the time of listing nor at the time of accepted contract; thus, it was not listed as a short sale. The information regarding the encumbrances was relayed to the buyer before close of escrow but not before the buyer had sold his current residence in order to complete the purchase of the subject property. The lawsuit claimed that the agent was responsible for the buyer’s damages because of the agent’s failure to disclose the financial encumbrances on the property. The court initially ruled in favor of the agent; however, this decision was overturned on appeal with the court stating that a broker is obligated to disclose to the buyer before the purchase contract was signed that there was a substantial risk that the seller could not transfer title free and clear of all monetary liens and encumbrances. In other words, a broker’s duty to disclose extends beyond the physical aspects of the property to the financial obligations on the property.
The court concluded that when a real estate agent is aware that the amount of existing liens on the property exceeds the sales price so that either the seller will have to put cash into escrow to close the transaction or obtain cooperation from the lender to complete the transaction, the agent has a duty to the buyer to disclose this information so that the buyer can evaluate the risk before entering into the purchase contract.
This case is a reminder to all that when you take a listing make sure that you obtain sufficient information from the seller as to all encumbrances on the property and possibly run a title report to document this information. The duty to disclose the financial aspects of the property, while not new, is an issue which is coming up more regularly in today’s real estate market and places a duty of disclosure to the buyer on the listing agent.
As always, let us know if you have any questions.
April 6th, 2012 at 6:54 pm
We have had a number of disputes recently revolving around whether a property’s seller could take a specific piece of personal property at close of escrow. In one deal, the seller took two crystal chandeliers. In another, they took the drapes from the living room. And, in a third, they took both the flat screen tvs and the custom brackets that they had built for those tvs. Of course, in each case the buyer was unhappy and looked to us to make them whole.
On first look it was seem that paragraph 8 of the Purchase Agreement deals with most of these issues. After all, that clause specifically says that “lighting fixtures,” “window coverings” and “tv brackets attached to the walls” are included in the deal. Unfortunately, in our cases the sellers claimed that those clauses don’t actually mean what they seem to mean. In the first, the seller stated that they bought and installed the crystal chandeliers in the home and therefore they were not “fixtures” as the term is used in the RPA. In the second, the seller stated that since there were shades on the windows behind the drapes, those shades were the “window coverings” and the drapes were not. And, finally, in the third the seller took the position that because the bracket had to be custom built for his television, it could not be used by the buyer and did not need to be left.
Regardless of whether you agree with the seller’s positions (which I don’t), the bottom line is when the buyer moved into each house, that item was gone and the seller was not going to give it back. So, with that reality in mind, what should you do to protect yourself from this problem? Obviously, the best thing to do is not to rely on the language of the RPA. As you know, and can see above, any language can be interpreted in multiple ways. So, rather than relying on that language, ask the seller a question – Do you want to take anything from the house at close of escrow? By dealing with the issue up front, everyone knows what the deal is and there is no disappointment or surprise at close of escrow. As we have said many times, problems arise when something happens that your client doesn’t expect. So manage your client’s expectations and ask the question. That way you buyer won’t be surprised when escrow closes and won’t reach in to your commission for compensation.
As always, please contact us with any questions you may have.
April 2nd, 2012 at 6:53 pm
Over the past few months, there have been questions regarding the revised anti-deficiency statute, specifically who and what it covers. There has been an anti-deficiency statute on the books since the 1930s in the form of California Code of Civil Procedure Section 580. This law provided that no deficiency judgment could be entered against a homeowner on purchase money mortgages. In other words, if the borrower used the money to purchase the residence, the lender was limited to regaining possession of the property and could not go after the borrower for any deficiency. The statute only addressed foreclosure situations and thus, the borrower was not protected in the event of a short sale.
Effective as of July 15, 2011 Section 580(e) was added to the statute which expanded the anti-deficiency rules to include the sale of the property for less than the remaining amount of the indebtedness outstanding at the time of sale upon written consent of the lender, in other words, in the case of a short sale.
This law also made it clear that the lender cannot ask for additional funds to be paid by the borrower to secure the consent to sell nor can the lender require the borrower to sign an agreement to repay the deficiency in exchange for consent to sell. If the lender requests such payment or repayment document, it is considered fraud by the lender and the borrower can seek damages against the lender.
Initially, we saw a lot of lenders trying to condition consent in violation of the statute, but more recently, the lenders appear to be complying with the law.
As always, let us know if you have any questions.
March 7th, 2012 at 6:52 pm
As many of you know, in the course of my job I spend a lot of time reviewing transaction files. In the course of that review, I have recently encountered a number of transactions where the Transfer Disclosure Statement and AVID were not delivered to the buyer until late in the transaction, sometimes after the buyer has removed their contingencies. Of course, there are numerous reasons why this is a problem and should never happen.
First, paragraph 6A(1) of the Purchase Agreement provides that the Seller “shall” deliver the TDS to the Buyer within 7 days. As a result, the failure to do so puts your Seller in breach of contract. Obviously that means you need to get the Seller’s portion of the TDS filled out quickly, and have yours done in the same time frame. We cannot have our failure to complete the TDS or AVID be the cause of our Seller’s breach.
Next, Civil Code section 1102.3 provides the buyer with a 3 day right to rescind the transaction within 3 days after the TDS is delivered in person or within 5 days after it is delivered by mail. Of course, as the listing agent, it is our duty to do everything possible to have that cancellation right eliminated as early in the deal as is possible. By delivering the TDS early, we eliminate that right early. Further, if the TDS is delivered after contingencies are removed, the buyer still has her 3 day right. Obviously, we never want to be the reason the buyer has another way to cancel the deal.
Next, in our experience, buyer’s accept negative disclosures about a property better early in the deal. Most buyer’s have a “honeymoon” period regarding the house immediately after their offer is accepted. I know that when I bought my house, there would have been very few disclosures that would have made my wife want to cancel. Rather, she loved the house and we would have figured out a way to accept any problem. I think the same is true for many buyers, so it is worth getting negative information to them early. Of course, later in the deal, when the glow has worn off and there have been other unpleasant issues between the parties, the buyer’s reaction to the TDS is much harder to predict.
Finally, your time is much too valuable to waste on someone who is going to cancel the deal upon receipt of the TDS. As a result, deliver it early and determine whether the disclosures are going to be a problem. If they are, you can move on to a real buyer. If they are not, you have just eliminated one hurdle to closing your deal. There really is no downside to delivering the disclosures as early as possible.
In short, don’t wait to get the TDS and AVID to the Buyer. There are legal, contractual and practical reasons to deliver these documents early. It will both make your deal more solid and prevent you from wasting more time than is necessary.
As always, please feel free to contact us with any questions you may have
