Residential Purchase Contract
Should Buyers HireTheir Own Attorney Or A 'Buyer's Broker' To Represent Them In Home Purchases?
Posted by: Kenny Tan
August 06, 2011
You may be surprised to learn that in many parts of the world, real property transactions are handled by lawyers. Sellers and buyers would still engage the services of real estate agents to assist them in terms of the marketing and hunting of real properties. However, the agents are minimally involved in the drafting of real estate purchase contracts.Even in the commercial sector, we also see agents here in this country getting themselves involved in the drafting of purchase contracts in smaller purchases.
But overseas buyers from countries like the United Kingdom or Australia aren't accustomed to nor comfortable with not having their own lawyers represent them throughout the whole process. I freqently receive emails through my website - sometimes phone calls at my office - requesting representation at different stages of the purchase. Some wants representation from negotiating the purchase contract through the siging of the escrow documents; others want representation to review title reports only. Lately I'm getting more requests for representation on purchases.
How Necessary Is It To Have A Lawyer Represent You On A Residential Purchase?
Unlike the agents, the lawyer is someone who's a little more disinterested in whether or not the deal closes. The pay for his services is not dependent on the outcome of the deal. Of course, sometimes he's wrongfully perceived as a deal killer for being a little zealous of protecting his clients' interests - for sure at the risk of upsetting his own client if the deal doesn't close.
This morning I came across a blog on Market Watch where Lew Sichelman the author mentioned the idea and benefit of hiring a "Buyer's Broker" to represent a buyer on a residential purchase. The idea of having a "Buyer's Broker" to assist you is to have someone who has your undivided loyalty throughout the entire transaction; someone who's not all concerned that he would lose the opportunity to earn his commission by being over cautious about the inspection aspects of the property, or that someone who is objective in evaluating whether it's safe and therefore a good idea to buy the property from your perspective only.
This article highlights the the reality that in most transactions in the US, there's really no one who's truly on the buyer's side. .
In California, for instance, agents' commissions are typically paid by the sellers, not buyers. There's the Listing agent and the Selling agent but no "Buyer's agent". Some people argue the Selling agent protects the buyers' interests. But I don't think they truly do as a practical matter though the law imposes a fiduciary relationship between the Selling agent and the buyer just to make sure there's always someone who's there to look after the buyers' interests.
There's a reason why they are called "Selling Agents". As every one aound here knows, the Selling agent whom the law counts on to look after the buyer's interests gets paid by the listing agent who gets paid by the sellers.
The law says the escrow owes no fiduciary duties to any of the parties. They are the middle persons. Presumably they don't favor either side. But anyone familiar with the industry knows that even escrow companies may subconsciously favor one side over the other. For sure, a lot of escrow agents would tell you that they would rather see escrow closes than not. In fact, many earn higher fees if the deal closes than if it doesn't. Many escrow agents get their business referrals from real estate agents who tend to choose them as the escrow agent for the deals. Also the escrow agents are not lawyers and can't give legal advice. So the buyer can't really consult them on title issues.
Even the title company has its own interests to protect. They sell a product - title insurance. They are no different from other insurance policies - full of exclusions and exceptions. Generally most buyers are unfamiliar with the scope of the title insurnace they are buying. Many expect title insurance to be absolute and don't know what the exceptions an exclusions stand for in the title policy until something happens to the the title. Let's face it. How many buyers actually review the preliminary title reports? They would typically sign off on them without actually reading them. Granted title insurance gives the buyers some protection just not absolute protection. Many buyers are too ignorant to know the difference between a CLTA and ALTA policy.
The answer? it's essential, but not necessary, to have a lawyer represent you on a residential purchase. Sometimes that can mean spending $250 to get a peace of mind or tens of thousands of dollars and years of litgation over something that could've been avoided had you had someone look after your interests on your purchase.
Sellers' Remorse: What Should An Agent Do? What About The Commission?
Posted by: Kenny Tan
April 17, 2011
When a seller changes his mind about a sale and wants to cancel the escrow, how should an agent handle the situation?
His own agent is usually the first person that the seller turns to for advice first - even before an attorney. For one thing, the advice is free; it's part of the service his agent provides - that's what most buyers and sellers believe. Most don't realize they might be asking the agent to give legal advice. They expect the agents to be knowledgeable in all aspects of real estate transactions including legal issues. In my experience, many sellers rely heavily on their agents to help them resolve even their legal situations - at least in the beginning of the crisis.
As agents, you don't want to see any seller's remorse because this means you might lose your commission on the deal. You might be tempted to offer a solution - sometimes even a legal one - to your seller in order to save the deal.
Depending on the reasons for the seller's morse, the agents may have a conflict of interest in this situation. For sure, the listing agent would have one because he probably has a signed listing agreement with the seller. (In California, an agreement to pay commission must meet the requirements of the statute of frauds). Depending on how the listing agreement is written, he may be entitled to recover commission from the seller when the seller improperly cancels the deal. Also the seller is at risk of paying damages to the buyers as well.
Most sellers don't recognize this conflict of interest and often divulge much confidential information to their own listing agents in hope of getting proper advice from their own listing. Something I've yet to understand, ignorant of this conflict of interest, most sellers and buyers trust their real estate agents than their own attorneys.
Many agents that I know would try to be helpful in this situation, not necessarily out of motivation to save the deal to recover commission. But agents are in the service business. At least the responsible agents would instinctively go out of their way to help their sellers.
However, the potential for conflict of interest remains. Sometimes the agent's negligence could be the contributing factor in a seller's remorse. Take for instance, sellers are mistaken about the amount of the encumbrance on their properties. Many agents would check the profile and learn about them before the listing and hence are better to warn the sellers the possibility that the sellers may find themselves having to put up their own money to close the escrow. This is one common cause of sellers' remorse. If this is the reason for sellers' remorse, sellers' attorney may advice sellers that their own agents may be a potential party in a lawsuit. Or when an agent represents tenants in common on a listing and he's aware that one tenant in common signs the purchase contract in the name of the other tenant in common without making sure there is a power of attorney authorizing such signature - and the agent didn't stop that from happening. The agent the professional is expected to recognize that to be unlawful and his failure to stop it may be negligence, if not a breach of fiduciary duty where the sellers remorse - also another situation where conflict of interest exists.
In the legal profession, if an attorney has committed an act which he believes gives rise to a legal malpractice, the attorney has an ethical duty to let his client know. In the real estate profession, no such duty exists. But should an agent attempt to help the seller his problem and avoid a lawsuit, disregarding any conflict of interest? Or should the agent refrain from doing anything and instead advise the seller to seek legal counsel immediately? This could be a difficult call.
Should You Say "No" To The Arbitration Clause In The CAR Agreement?
Posted by: Kenny Tan
December 21, 2010
We know there are mediation and arbitration clauses in the standard CAR listing and purchase agreements. The CAR's attorneys think it's a great idea to resort to alternative dispute resolution (ADR) instead of litigation.
Mediation Is Great Way To Avoid Litigation
I personally think the mediation clause is great. It gives the parties an opportunity to resolve disputes arising out the real estate purchase contract without spending a lot of money in litigation.
Though it is voluntary, it carries with it a penalty for not attempting mediation before filing a lawsuit. You would lose your right to recover attorney's fees from the other side even if you ultimately prevail, if you refuse to mediate or simply neglect to attempt mediation before filing a lawsuit.
Courts will enforce the mediation provision. I represented a seller on a case involving a dispute over the CAR standard listing agreement. Though we lost the case, we successfully convinced the trial court that the agent was not entitled to any attorney's fees because he failed to attempt mediation before filing suit and prevented the listing agent from recovering a whopping $500,000 in attorney's fees!! Thanks to the mediation clause.
(You'll be surprised how many attorneys -particularly those who don't handle real estate disputes very much- neglect to advice their clients to mediate before filing suits. This could be a potential malpractice trap for the inexperienced attorneys)
Arbitration May Not Save You Money And Time
But I don't feel the same way about the arbitration clause.
Is arbitration always better than litigation when it comes to resolving disputes in real estate transactions? This question is subject to debate.
What should agents advice their clients regarding the arbitration clause in the standard CAR purchase contract?
I've done a little informal survey of clients (buyers and sellers) that came to consult me on disputes over the CAR agreements. I would usually ask them why they agreed to the arbitration. I estimate more than 80% of them would tell me their agents told them they MUST initial the arbitration clause or there cannot be a deal. Many didn't even understand that when they initialed the arbitration clause, they gave up their right to jury trial and the right of appeal.
Some people believe arbitration is cheaper and quicker. But that's not necessarily true.
There are some costs associated with arbitration that you don't incur in litigation. The filing fees are proportional to the amount in dispute. In many cases,the filing fees alone are several thousand dollars where you'd pay only $395 in the superior court and there's no limit on the amount you can sue for. On top of the filing fees, you pay administrative fees to their staff. In litigation, the judges are paid by the tax payers whereas in arbitration, the arbitrators are paid by you and typically charge $400 to $500 per hour. I've had cases that went to arbitration that cost over $200,000 in fees and costs (out of which $40,000 went to AAA for administrative fees and arbitrator's compensation).
Arbitration can take just as long as, if not longer, than litigation. I've had cases that took longer than two years to go from filing the claim to the final hearing.
Arbtirators May Ignore The Law In Deciding Cases - And There's Nothing The Loser Can Do About That
It is settled that the outcome of an arbitration is generally not reviewable. In fact, errors of law are not reviewable in court, no matter how egregiously the arbitrator has ignored the laws - this is the single most frustrating part for me.
It is frustrating for me because as an attorney, I expect cases to be decided in accordance with the law. I hate being called a liar by the client after an arbitration is over and my client is the loser. Clients come to me for help with a great deal of respect for my knowledge of the law. When an arbitrator doesn't follow the law and the client loses a case and I have no recourse, that's the worst feeling in the world for me as an attorney.
Punitive Damges May Be Awarded In An Arbitration And Not Reviewable For Errors
It may shock some people to know that punitive damages may be awarded in an arbitration proceeding, perhaps even more shocking to know that it is practically not reviewable.
A defendant in any lawsuit is very concerend about the possibility of punitive damages being imposed. In litigation, there is a contitutional limit on the amount of punitivfe damages that may be imposed on an individual. For instance, the amount is generally limited to no more than 10% of aperson's net worth and not more than twice the amount of the compensatory damages.
The CAR arbitration clause is very broad and certainly broad enough to include possible fraud claims against the agents in the case of an Exclusive Listing Agreement and the buyers and sellers in the case of the Residential Purchase Agreemetn and Joint Escrow Instructions.
It's a scary thought to know that you may be hit with punitive damages in an arbitration and there is no right of review on the award - and you had no ideal that's what you signed up for when you agreed to the arbitration clause on the CAR agreement.
Clients Should Be Advised That They Don't Have To Agree To The Arbitration Clause
I think real estate agents owe it to their clients to inform them that they have the option not to agree to the arbitration clause, or at a minimum, to advise them that they should consult an attorney on whether to agree to it. Agents should never tell their clients that they have to agree to the arbitration clause or there's no deal. You'll be surprised how many clients would say no to the arbitration clause once they understand it better and the legal consequences of having agreed to it.
Should ALTA Policy Be Made The Title Insurance Of Choice In The Purchase Contract Unless The Parties Opt For CLTA?
Posted by: Kenny Tan
August 30, 2010
In my experience, many first-time buyers (even experienced ones) don't know the difference between an ALTA policy from a CLTA policy. Few buyers pay attention to the issue of boundary survey to make sure the property they're buying doesn't encroach on the neighbor's property.
In the standard CAR purchase contract, sellers pay for CLTA title policies. In most instances, that's adequate to protect the buyers. However, every once in a while, buyers don't realize they're buying into lawsuits with their new neighbors because the fences don't sit on the property lines. After moving in, they may be surprised when their neighbors start moving the fences closer to their house and showing them the property surveys the neighbors obtain from land surveyors.
Sometimes the buyers are without recourse in this situation as the sellers might've been honestly unaware that the fences were not sitting on the property lines. When the buyers contact the title insurance companies, they're probably told that what they'd bought was an CLTA policy which doesn't cover boundary issues. Most real estate agents don't bother to explain to buyers the differences between the two policies. It's debatable if the agents have a duty to explain the title policies to the buyers.
Had the standard purchase contract provided that the sellers shall provide ALTA policies and the parties may opt for CLTA, the buyers might ask why the sellers want to opt for CLTA when the standard contract requires him to get ALTA and become aware of the differences and may negotiate to get the ALTA.
Since title companies will not issue ALTA policy without a boundary survey, it's inevitable that the buyers will learn of boundary issues during the escrow and may decide whether to accept the property "as is" or cancel the escrow.
Agents: Is It A Good Idea To "Deliver" Documents By Emails Under The CAR Purchase Agreement?
Posted by: Kenny Tan
July 31, 2010
The CAR Standard Residential Purchase Agreement allows important notices to be delivered by emails, any form of mailing service, or personal delivery. Under the standard form agreement, delivery is deemed complete when the principal or the agent has "received" the documents. Since the time to respond to a notice is measured from when the notice is received and "time is of the essence" (and the court will enforce the time requirements in this type of contract, it's important to have a clear understanding on when a document is deemed "received."
These days many real estate agents conduct business through the internet. They also tend to communicate by emails. Important notices are transmitted as attachments to emails.
When is delivery complete when notices are sent by email? When the email is sent? When the email is received? Or when the attachment is opened? The answers of these questions can be very different depending on the circumstances. The first one is easy because we know delivery is not complete until the notice is received. But when's a notice received? When it arrives in the "inbox"? When someone opens and reads the content of the email? Or when the attachment is opened?
A problem may arise if the content of the email doesn't mention anything about the attachment. Say the "Notice To Buyer To Perform" is sent as an attachment. Is delivery complete when the email is opened? Or when the attachment is opened?
With emails, you can prove when it's opened by requesting a "message received" confirmation but the same service is not available to confirm the attachment is opened. What if the content says nothing about what's being attached and the agent never opens the attachment, and the document attached is a "Notice To Buyer To Perform" and the seller wants to cancel because buyer fails to timely perform, how do we decide this dispute?
Sorry, If You Don't Mediate, You Don't Get Your Attorney's Fees.
Posted by: Kenny Tan
July 25, 2010
Mediation clauses are contained in many, if not all, of the standard CAR contracts in California (residential leases excluded). You find them in the standard residential purchase agreements and listing agreements.
The clause prevents a party from recovering any attorney's fees in litigation (arbitration included) if that party fails to attempt to mediate the dispute before filing a lawsuit.
What a great idea! Litigation is very costly, both financially and emotionally. The "bad guy" who starts a lawsuit without giving mediation a chance gets no attorney's fees. Courts will enforce it. There have been a few appellate cases dealing with this issue.
However, there's one situation that's not adequately addressed in the mediation clause. What if the "bad guy", say the listing agent, starts a lawsuit having previously completely failed to attempt to mediate a commission dispute (not even a letter, email, or phone call to demand mediation), I think the contract is clear that thelisting agent would then be deprived of any attorney's fees in litigating his action. However, if during the litigation but before he files his cross-complaint, the owner demands mediation which the listing agent refused; the owner then files a cross-complaint on matters arising out the listing, such as agent's negligence in handling the listing, and ultimately the agent prevails not only on his complaint but also on owner's cross-complaint. We can safely assume the listing agent doesn't get his attorney's fees on the complaint. The question is: Should the listing agent be allowed recovery of attorney's fees in defense of the owner's cross-complaint (assuming these fees can somehow be separated from the fees incurred on his complaint), or should the agent be disallowed ANY attorney's fees in the entire suit?
"2 Days" Don't Mean 48 Hours When It Comes To Limiting Buyer's Time To Perform
Posted by: Kenny Tan
July 24, 2010
In April 2010, the California Association of Realtors revised the Residential Purchase Agreement And Joint Escrow Instructions. The revisions affect the amount of time Buyers have to respond to Seller's Notice To Buyer To Perform.
Sellers may wish to cancel the purchase contract during the escrow for whatever reasons. But Sellers need to look for legal justification to do so. Generally Sellers would have to wait until the closing date to see if Buyers' purchase money comes in, and cancel if Buyers' miss the closing date, or properly deliver a Notice To Buyer To Perform, wait for the time to perform has expired and still there's no performance by Buyers, and then cancel.
Previously and before the form was revised, the time to perform is expressed in terms of hours, e.g. 24 hours. For instance, if the Seller delivers to Buyer a Notice To Buyer To Perform within 24 hours of receipt of the notice, Buyer has no more than 1440 minutes to perform. Now with the revisions, time to perform is expressed as days, not hours. You might ask, doesn't one day means 24 hours and two days mean 48 hours? No, not as used in the context of the Notice To Buyer To Perform CAR standard form. You decide how many Days After the delivery of the notice you would like Buyers to perform. But the contract says the minimum is 2 Days (After). But on the final day to perform, Buyer has until 11:59 pm, regardless of at what time of the day the Buyer receives the notice two days prior. For instance, if you deliver the notice to the Buyer at 8 am in the morning on Wednesday, Buyer has until 11:59 pm Friday night, not 8 a.m. that Friday morning, to perform. Seller can't wait till 8:01 am, Friday morning, and say, "that's it. Time expired. I cancel'.
