Real Estate Flashcards
Responsibilities of Transactional Lawyers
Due Diligence
Engagement Letters
Conflict Waivers
Letters of Intent
What id Due Diligence?
reviewing documents for red flags
Example: if client is purchasing an office building, lawyer would read every lease agreement, review survey, mortgage, and title on the building looking for any issues
What is an Engagement Letter?
(1) Defines the scope of services
- include client(s) name(s)
- look for personal names error when should be company name
(2) Defines Compensation
- hourly rate, retainer/deposit, billed monthly, premium if finish early, etc.
What is a Conflict Waiver?
If the same firm represents both clients, but in separate issues, they must sign a conflict waiver consenting to the issue
What is the Scriveners Exception?
If both sides use the same lawyer, the sign a form stating they understand they are not getting legal advice and are trusting the objectivity of the attorney.
What is a Letter of Intent
Signed agreement by both parties expressing intent
- includes material facts such as property and price
- Must clearly state “this is not a binding K” or something similar
- Satisfies Statute of Frauds
What is a Broker
Licensed,
Owes a fiduciary duty to clients (including high ethics, accurate pricing, duty to disclose)
Receive commission from buyer
If unpaid, normal remedy is to sue, not place a lien (unless commercial)
Agents
Licensed
Must work w/Broker
Only gets paid commission from Broker, not buyer.
Realtor
Due paying member of the National Association of Realtors
Similar role to Broker but w/less in depth training and expertise.
Can a Broker represent both sides of a transaction?
Yes
Dual Agency (allowed by both states) permits such action so long as both buyer and seller agree in writing.
What is a Listing Agreement?
Service agreement in which the Seller allows broker to list the property for sale - creates a fiduciary relationship between broker and seller
- includes names and legal description of property
- includes commission (how paid and how much)
- includes seller’s terms (such as the buyer must pay all cash)
- includes a termination of service date
When has broker met their duty and thus entitled to commission?
When Broker: finds a willing and able buyer on the seller’s terms
What if the seller rejects the buyer (breaches)?
Broker is still entitled to commission
What if the buyer breaches?
Commission still owed absent other terms in the agreement
Such as “commission due if and when title is transferred.’
What is a full service broker?
Provides full service –>
lists the property,
provide promotional material to sell faster,
show houses to potential buyers
receives higher commission
What is a discount Broker
At a minimum, post house on Multiple Listing Sites (MLS)
Less work, less commission.
What is a Cooperating Broker?
Not the listing broker, but still finds the buyer
Commission typically split 50/50
Types of Listing Agreements, and which is the most common?
Open Listing
Exclusive Agency Listing
Exclusive Right to Sell (most common)
What is an Open Listing
(non-exclusive listing)
Seller only pays commission to the first broker who finds able and willing buyer on seller’s terms.
More common in commercial
Issues: can be unclear at who was actually the leading cause/finder
Seller can find buyer - no commission to broker
What is an Exclusive Agency Listing Agreement?
Seller promises not to approach a different broker through the duration of agreement
- if a different broker finds buyer, the original still receives all commission.
Seller can still find buyer - no commission to broker
What is an Exclusive Right to Sell Listing
Guarantees broker commission if property is sold w/in duration of agreement. - regardless of who finds buyer.
Seller may negotiate terms such as “if I sell to ____ (specifically named person), no commission due. - usually has a stated deadline for this option.
What are some Commission/Payment Methods?
Percentage of purchase price (most common)
Flat Rate
Hourly Rate
Net Listing –> any amount over a specific sale price goes to broker (rare, creates room for dishonesty)
What is an Override Period (Tail Period)
Broker protection clause stating that even if the K term has ended, if buyer was found by broker, commission is due.
This clause still requires a definite end date.
Essential Terms of a Real Estate K
(1) Comply w/Statute of Frauds
(2) the parties’ identities
(5) The Finalized Purchase Price
(3) words indicating each party’s intent to buy or sell
(4) Adequate Description of the Property (legal description is not required, but must be free from ambiguity)
Statute of Frauds Requirements
- In Writing
- Signed by the party to be charged (party saying no K) (each doc)
- Identify the Parties
- Specify Price (sufficiently definite, no more negotiation)
- Adequately describe property, free from ambiguity
- Reciprocal promises (buy/sell)
- Contain Material terms
Exceptions to Statute of Frauds
Parol Evidence Rule
- only admissible to reconcile
ambiguity, cannot add any
new terms, or contradict
existing terms
- Beware of integration
clause - both parties agree
no PER
Full Performance
- Complete performance,
SoF no longer applies
- Seller able to tender deed
- Buyer pays
- LL has tenants ready
Part Performance
- Usually actions taken by
buyer such as
- paying part/all purchase
price
- makes improvements and
seller does not stop buyer
from doing so
What is an Adequate Description of the parties?
- ID the true owner, or all true owners, and has signatures of each (if married, include both names)
- In commercial world, signors need to have authorization.
- Issue: is the signor incompetent? ability to sign. ex. dementia patient =/= competent
Assignment Provisions
Common Law = a buyer may assign their interests freely, w/out seller’s consent
SoF
Exception: if the seller is providing financing to the buyer, buyer cannot assign b/c they agreed based on credit score
Items to include in Pricing Section
Purchase Price
Deposit information
Closing Costs
Prorations
Contingencies
Adequate Purchase Price in K
Typically the Gross Price
May also be formulaic (100 x acre/lot, following a survey)
Seller may set a floor price
Cannot be any more room for decision or negotiation.
Security Deposit
K states the amount (usually a percentage of purchase price)
Who holds the deposit (typically the broker)
Whether or not interest is paid back to buyer
Seller Use of Deposit, or not
Refundable - terms in which deposit may be returned
Some K have two step deposits
Closing Costs
States who is responsible to pay for:
Fees of surveyor
Cost of title insurance
State and local tax
transfer taxes
mortgage tax
etc.
Prorations
Rationing payments due to who had the home for which parts of the year.
if taxes are 10,000, and buyer purchased on June1, they will split the year end taxes due 50/50
Taxes, insurance, sometimes mortgage payments being assumed
If seller owes anything, deduct form purchase price
Contingencies
Common Law = no contingencies
Types: (deposit returned and K void if)
Each contingency must have a deadline and cannot be illusory
(1) Financing Contingency
(2) Appraisal Contingency
(3) Condition of the Property Contingency (house inspection)
(4) Miscellaneous (i.e. contingent on if I can sell my house)
What are House Inspections
Negotiable, not required. (in hot markets, most sellers refuse to accept any contingencies)
Visual Inspection - some defects can be seen, other latent defects cannot
Many States require inspectors to be licensed - provides objective evaluation (looks at plumbing, electrical, roof, structural, HVAC, etc.)
Usually a good idea to confirm that inspector has insurance in case they are injured
When does the home inspection take place?
Negotiable - usually has limits on how long buyer has after inspection to back out
Typically done well in advance of closing - to ensure nothing happened in the mean time, buyer/inspector does a final walk through on the day of closing
What is the Doctrine of Equitable Conversion?
The Buyer becomes the legal owner as soon as he signs a binding document to purchase.
Thus, in the time between signing and closing, buyer bears the risk of damage (fire)
Important to include language in favor of client as to this doctrine.
What is Caveat Emptor?
Common law rule: Buyer Beware - buying as is. (condition of home, title, etc.)
Seller is not obligated to make any affirmative statements (unless seller is professional home builder, statutes require them to make certain reps/warranties)
Homebuilders can right their agreements so that the statutes do not apply, or are applied a specific way.
Exception to Caveat Emptor
Latent Material Defects
Seller must disclose any latent material defect of which they have knowledge
Broker/Agent/Realtors held to a much higher standard than the common seller. Duty to disclose
What is the Statute of Repose?
Similar to Statute of Limitations
Time begins to run when a specific event occurs.
For example, in construction cases, the statute of repose typically begins to run once construction is completed
SoR is an absolute limit on time, not tolled, starting w/end of construction and ending (depending on state) between 5-10 years
Other Required Disclosures
Some jurisdictions require disclosing
lead paint
if used as meth lab
if violent crime
AIDS
Haunted (knew and should have disclosed)
Time for Performance
Default Rule: unless language states otherwise, closing dates and times are regarded as approximate
if no time stated, “reasonable time”
If exact date is wanted, include Time is of the essence clause
Potential Timing Issues
‘purchase shall occur within ten days”
including today? if today is the 10th, that could mean the 19th if including today, or 20th if not
is this 10 business days? exclude holidays? if so, federal or state?
Does the day end at 5? or 11:59 at night? or 12:01 in the morning? (can you accept on the tenth day?)
What is the Doctrine of Merger?
Common Law: Any reps/warranties given prior to closing end when the deed is transferred
Unless stated otherwise in K - K can state which parts survive the conveyance of the deed and state a time frame.
K Remedies
Rescission
Damages
Specific Performance
What is rescission?
If K is rescinded by the seller, buyer may cancel the deposit and terminate the K
What Damages are available?
Actual Damages
Liquidated Damages
Punitive Damages - not likely, not legal - this is a tort claim, not K claim
Important: In any event, do not leave yourself liable to unlimited damages.
What are Actual Damages
Actual Damages (benefit of the bargain)
— Compensatory Damages - how much you were damaged out of pocket
—Reliance Damages - recover expenditures accrued in reliance of the K
What are liquidated Damages?
– Most Common in K
– a specific amount due upon breach that both parties agree upon because of uncertainty of actual damages.
– usually the seller takes the money out of deposit
– Buyer wants specific performance if seller breaches. Thus, as the buyer, do not include language preventing you from suing for specific performance even w/liquidated damages
–amount must be reasonable (some states have specific statutes)
What are Lis Pendens?
a notice that is recorded in the title to real property and gives notice that the property is the subject of pending litigation.
Marketable Title Standard
Absent other language in the K, seller must convey marketable title to the land (marketable at closing)
Legal Marketability
“Would a reasonable future buyer object?’
“Would a reasonable person think this title is acceptable?”
What makes a title unmarketable?
Defects (forged deed)
Liens (mortgage, mechanic’s liens, even HOA)
Encumbrances - right of 3rd party that diminishes the value such as:
- Easements (unmarketable)
- Beneficial easements (utility easements) do not diminish value.
Threats or Pending Litigation
— Threats do not render the title unmarketable
Tenancies - unexpired leases render unmarketable (David Babyon selling our house while we still live here)
Code Violations
Requires high Insurance Rates
Insurable Title Standard
Same as Marketable = would a reasonable person think this is marketable/insurable?
What is a Title Report?
Assesses the state of the title
- what has been recorded in the land records regarding this title
What is a Title Committement
a promise by insurance company to issue, at closing, a title insurance policy.
Title Policy
Issued at closing
Owner’s policy typically covers the cost of the purchase price
Lender’s policy insures the lender up to the amount of the loan
Covered Risks w/in Title Policy
Indemnity Policy - for amount covered
Duty to Defend - pay for legal defense (w/out $ limit)
Protects against:
- Title vested in someone else
- Lien/encumbrances, other than exceptions
- unmarketable title
- access to and from the land
Endorsements - anything that would be an exclusion or exemption (see next card) but buyer pays more for such coverage
What is excluded from coverage?
Exclusions are anything that arises in the Title Report that the insurance company does not want to protect
- known encumbrances
- zoning requirements
Exceptions (also not covered)
- anything the owner can see (i.e. current tenancy)
- anything in the land records (i.e. easements, liens, other recorded conditions)
Other Boilerplate in Title Policy
Name of Owner
Fee-simple, etc.
Legal Description of Property
Surveying Calls (Metes &
Bounds survey outlining
property)
Effective Date
Who typically sets title insurance rates?
State regulated
What is a Survey?
Method of providing the Legal Description of the property
What is the Survey looking for?
House Location Survey - shows where house is built to show no encroachment of buildings outside zoning requirements
Alta Survey (American Land Title Association) - shows everything that affects the property. Reviews all docs and records what they see on the site.
Privity of Survey Surveyor states legally that this survey was prepared for the owner, lender, and title insurance company.
Types of Legal Descriptions
Metes and Bounds
- very precise direction and distance (i.e. North 81 Degrees, 4 minutes 35 seconds West 900 feet)
Subdivision Plat (Deed of Subdivision)
- Lot #12 in phase 2 of Woodbriar in Davis County, UT
Government Survey (US Public Land Survey System)
- Gov divides land into sections, subsections, into a grid pattern and then assigns each lot a number
Common Boundary Disputes
Adverse Possession
—- actual, open and notorious, so that the owner has notice of it and the possessor has exclusive uninterrupted possession for the statutory period
—– to avoid this from happening, give them a revokable license
Prescriptive Easements
