Form 17 — an addendum to the contract?

As always, this is not legal advice. If you want legal advice, consult an attorney, not a blog.

Is the Form 17 part of the purchase and sale agreement (PSA)? Should it be listed in the “Addendum” paragraph of the PSA? In a word: NO! (At least if you’re the seller — if you’re the buyer, then YES!)

First, some background: Here in Washington, a seller is required to provide a fairly comprehensive Seller Disclosure Statement to any buyer of real property. Our local MLS provides this to sellers as its “Form 17,” so everyone in the biz refers to this legally required disclosure statement as the Form 17. Pursuant to the statue, the Form 17 “is for disclosure only and is not intended to be part of any written agreement between the buyer and the seller,” i.e., it is not supposed to be part of the PSA. On the first page of a PSA, there is a section in which the various addendums to the PSA should be listed so that there is a clear description of the complete contract and its terms.

In practice, many agents (and unrepresented parties) will list the Form 17 along with the various addendums that are typically included in the PSA (e.g., financing contingency, title contingency, inspection coningency, etc.). If you are a seller, this is a significant mistake. Conversely, if you are a buyer, this provides you with some leverage if the seller fails to disclose or misreprsents a defect in the house.

By listing the Form 17 as an addendum to the contract, the parties incorporate the Form 17 into the contract notwithstanding the statutory language. In that event, if the seller fails to disclose or misrepresents a defect, then the seller has arguably breached the contract. This would give rise to a breach of contract claim against the seller, which is an easier claim to prove than a claim of fraud, the typical claim arising out of a seller’s misrepresentation. Moreover, the PSA contains an attorney’s fees clause. Thus, if the buyer were to prevail on the breach of contract claim, he would also be entitled to an award of his fees and costs incurred (which will very likely exceed the cost to repair the undisclosed defect). Fees and costs typically are not available on a fraud claim (although the case below calls that proposition into doubt, a topic of a future post).

A very recent case helps to illustrate this point. Stieneke v. Russi, decided July 1, involved a seller’s failure to disclose a leaking roof. At trial, the court concluded that the Form 17 was part of the contract, even though the buyers signed it four days after mutual acceptance. The trial court reasoned that a seller should not be able to easily avoid liability for the contents of the Form 17. The court found that there was “an understanding” between the parties that the Form 17 was “part of the deal.” Accordingly, the seller was liable for breach of contract.

On appeal, the appellate court reversed the trial court. The appellate court focused on several issues, including the fact that there was no mention of the Form 17 in the PSA itself. Had the PSA referenced the Form 17 in the “Addendums” section, thus specifically including the Form 17 in the terms of the contract, the appellate court would have had a much more difficult time concluding that the Form 17 was not part of the contract.

So, if you’re a seller and you receive an offer showing the Form 17 as an addendum, prudence would dictate that you strike that term and present the counteroffer back to the buyer. There is no reason to include the Form 17 in the contract, and indeed the legislature did not intend for it to be part of the contract as indicated by the statutory language. On the other hand, if you’re a buyer, go ahead and list the Form 17. Why not? It is common practice among agents and there is a good chance the seller will accept this term. In that event, you will have some additional protection to insure that the contents of the Form 17 really do reflect the actual knowledge of the seller. If the Form 17 does not reflect the seller’s actual knowledge, then you will have a good claim against the seller for the costs you incur as a result.

[Footnote: the damages in the Stieneke case, the cost to repair the leaking roof, was $72k, but the attorney’s fees and costs were $175k. Clearly, as a buyer it is really, really good to preserve any ability to recover your fees and costs in the event you have a claim against the seller. In a future post, I’ll discuss other interesting aspects of this case, including the basis for this award of fees even though there was no breach of contract claim.]

Our New Responsible Mortgage Lending law

Just when you thought you had seen the most stupid law from our legislature regarding real estate omitting common sense, here comes another! House Bill 2770 aims to make what was a federal offense a state class-B felony. While it is aimed at mortgage brokers, it has wide sweeping implications to real estate agents, buyers, sellers, home inspectors, contractors, and just about anyone else who has even a limited financial interest in a real estate transaction involving a mortgage.

cross my fingersThis law provides that a residential mortgage loan may not be made unless a disclosure summary of all material terms is placed on a separate sheet of paper and has been provided by a financial institution to the borrower and that a financial institution may not make or facilitate the origination of a residential mortgage loan that includes a prepayment penalty or that imposes negative amortization under certain circumstances. And here’s the catch-all clincher: The law says that certain acts and omissions by any person in connection with making, brokering, or obtaining a residential mortgage loan are unlawful.

While part of the law attacks important issues like negative amortization and pre-payment penalties, it’s the broad definition regarding the disclosure of material facts relating to a property that causes me the greatest concern.

Example: Buyer purchases a home “subject to inspection

Mortgage Broker Commission Meeting Tomorrow

There’s a Washington State Mortgage Broker Commission meeting tomorrow, May 7th at the Renton Community Center to discuss the impact of State Senate Bill 6471. This legislation ammends the Consumer Loan Act and Mortgage Broker Practices Act requiring all lenders to become licensed under the Consumer Loan Act (except those licensed under RCW 63.14)

This change in the state law was put in place to close a loophole. Some mortgage brokers were issued an exemption certificate by their regulator, DFI, because they had received approval as a Fannie Mae/Freddie Mac direct lender. Though still subject to the MBPA, these lenders, an estimated 300, were operating with no state regulatory oversight. This loophole is now closed.

Mortgage brokers are complaining loudly that this change will cost their firm lots of money. I would like to see the raw numbers on their estimates.

I will be attending tomorrow’s meeting, and if I can catch a wifi signal, I will blog live.

This does not appear to be a “closed” meeting since DFI is indicating that the room capacity is 100. I received no notice about this meeting, which is odd, since DFI is always very good about notifying all of us via their listserve.

Time: 1:00 PM
Location: Renton Community Center
Address: 1715 Maple Valley Highway, Renton 98057
Driving Directions

While I was away…..

I have not posted in quite some time as I have been consumed with a move to a new firm.  As of three weeks ago, I am now Of Counsel to the law firm of Bullivant Houser Bailey.   

In that period, a very significant case was decided that will greatly impact buyer/seller/broker relationships.  On March 1, 2007, the Washington Supreme Court essentially decided that buyers will no longer have a claim for negligent misrepresentation in post-closing property condition disputes.  For the first time in Washington state, the Supreme Court applied the Economic Loss Rule in the context of a real estate transaction.  The Economic Loss Rule generally provides that where two parties enter into a contract (e.g. a Purchase and Sale Agreement) and economic losses occur (as opposed to physical harm or personal injury), recovery is confined to the contract. 

By way of background, if a buyer of real estate closes and then determines that the property was not in the same condition as disclosed or that the seller withheld material facts, the buyer historically had two ways to state a claim against the seller.  The first was via the contract if there were any express warranties that could be enforced.  However, most residential transactions have few, if any, warranties that benefit the buyer.  So practically, the buyer was forced to go outside the contract and rely on a claim of negligent misrepresentation or fraud (also known as intentional misrepresentation).   These claims are called torts.  Since fraud is very difficult to prove, the claim that many lawyers have relied on for their buyer clients is the negligent misrepresentation claim.   Those days are over! 

In determining whether the Economic Loss Rule applies, the key inquiry is the nature of the loss and the manner in which it occurs.  In other words, does the loss deal with economic injury (e.g. loss of bargain) or personal injury or injury to other property.  If the loss is economic, and no exception applies, then the complaining party will be limited to whatever contract remedies exist.

In the recent case of Alejandre v. Bull, the Buyer claimed that the seller should pay for damages associated with a failed septic system.  The facts are lengthy but like most post-closing property condition disputes, this one clearly involved economic loss and not personal injury.  In a nutshell, since the buyer had no warranties regarding the septic system, they were out of luck unless they could prove that the seller intentionally misrepresented the condition of the septic system (i.e. committed fraud).  In the court’s mind, a negligent misrepresentation was not enough to override the “bargain” struck between the parties under the contract which did not include any warranty for the septic system. 

There will be many buyers who encounter a post-closing loss and start looking for a (deep) pocket.  While the liability of the seller to the buyer is limited by the Economic Loss Rule, no such luck for brokers and agents who have statutory duties (many of which are non-waivable) under RCW 18.86. Those duties include the duty to use reasonable care and skill, to disclose material facts and to advise their client to seek expert advice on matters relating to the transaction that are beyond the agent’s expertise. 

Buyers would be well-served to negotiate warranties that apply to aspects of the property that are important to them.  At the same time, brokers and agents need to understand that while they legally don’t have any greater duties to the buyer, the practical effect of this case will cause unhappy buyers to look to the broker’s E/O policy with greater frequency.  Now more than ever, brokers and agents will make sure that the buyer conducts comprehensive due diligence concerning the condition of the property and that appropriate experts are hired to advise them.  

All properties have warts.  The key is to expose them before closing so that the buyer can determine if they can live with them.


A case for the ages. Perry Mason, where are you?

Here is a scenario bouncing around in my mind. Complicating this problem, imagine this scenario occuring two days prior to closing. What would an attorney think?[photopress:j0402451.jpg,thumb,alignright]

The facts:

A buyer who happens to be a real estate managing Broker-owner is purchasing new construction from a builder. The buyer (Broker) asks for a discounted escrow fee because buyer (Broker) has a history of referring business (sellers or buyers) to escrow company handling this closing. The escrow company refuses to discount buyer escrow fee. The seller (builder) receives an estimated HUD-1 Settlement Statement which shows an escrow fee based upon each party paying an equal 1/2 of the total escrow fee, in full compliance with the local Northwest Multiple Listing Service (NWMLS) Purchase and Sale Agreement (PSA). After reviewing the settlement statement, the builder-seller calls the escrow company and requires escrow company to reduce the escrow fee because it is “tradition” or the seller (builder) will refuse to close. Learning of this, the buyer wants the same fee as the seller. To comply with the law, the escrow company must comply with the terms of the purchase and sale agreement, in addition to complying with RESPA. Locally, the Northwest Multiple Listing Service Form 21 Section ‘H’, line 56, provides that:

Seller and buyer shall each pay one-half of the escrow fee unless the sale is FHA or VA financed, in which case it shall be paid according to FHA or VA regulations.

Escrow raises this issue and asks parties for clarification because the purchase and sale agreement in question has no other addenda indicating disclosure of builder-seller receiving a discounted escrow fee. Once again, the seller (builder) immediately requests escrow to discount escrow fee or they refuse to close and further escalates the issue by threatening to move the transaction.

This problem raises a few issues.

  1. Is the Broker/buyer in clear violation of RESPA regarding potential kickbacks?
  2. In this case,there is no builder addendum indicating or disclosing to buyer/Broker that the builder will be receiving a discount. Builders routinely receive significant discounts on escrow fees, particularly if closing through a title company. Many builder generated addendums address the discounted escrow fee.
  3. Under the terms of the purchase and sale agreement, is the builder potentially in breach of contract by refusing to close? For example, if the buyer, who happens to be a real estate broker, (never mind asking for a discount equal to the builders perceived “traditional” escrow rate) stood firm by indicating each party shall pay an equal escrow fee as provided in the PSA, would the builder be in breach of contract?
  4. Does the buyer and seller understand the purchase and sale agreement terms?
  5. How does HUD treat the situation where builders receive discounts in title or escrow fees?
  6. Do you think this scenario is plausible?

All you Perry Mason’s, looking forward to your comments…..

(Are We) Oil and Water?

In a comment to a post on Financing Contingencies, Reba baited Craig and I to write a post on the uncommon relationships between real estate agent and attorney.   She said,

“Maybe it’s worth another blog post to discuss why some agents seem to feel that they are diametrically opposed to attorneys when it comes to real estate transactions. I constantly hear people say “if an attorney gets involved this deal is dead

Licensed to Loan

This New Year brought significant changes to the mortgage industry. Loan Originators who provide residential loans in Washington State are now required to be licensed. This legislature applies primarily to Mortgage Brokers and not LOs who are employed by banks or credit unions. As I am employed by a Mortgage Broker (technically, we are a Correspondent Lender…I’ll save that for a later article), I thought I would share some tidbits of what I’ve found so far during the first two weeks into the licensing period.

I completed my online application with DFI, submitted my MU4 forms and 2 sets of fingerprints all prior to the due dates so that my background check to determine that I am not a felon and do not have any gross-misdemeanors can be performed. DFI is inundated with applications and they are posting the list of licensed loan originators on line. I’ve been checking the list daily for my name and license number. As of Tuesday, DFI is showing 9,913 licensees from 123 Cash to Zippy Cash. Loan Originators must display their license number on their business cards, loan applications, marketing and websites. This seems kind of odd to me. Realtors and Escrow Officer’s (L.P.O.) do not have to attach their number to their name for the public to see…don’t they trust us?

Currently, Loan Originators who have completed the required steps of the online application, MU4 and fingerprints are operating under an “interim license

When real estate agents practice law…

Bad things can happen. I recently worked on a matter where seller signed an offer. The offer included an escalation clause and indicated that the the legal description was “to be attached.” However, the offer also included the tax parcel number. The listing agent attached a new addendum stating the sale price as a sum certain (calculating the price based on the terms of the escalation clause) and attaching the legal description. The seller initialed these “changes” and sent them to the buyer for the buyer’s approval. All other terms of the offer were unchanged and accepted by the seller.

Before getting a response from the buyer, the seller received another, substantially better offer from a second buyer. The listing agent informed his client that he could still revoke the first offer and accept the second because, when the offer was returned with a legal description and a sum certain sale price, it constituted a counteroffer. Thus, according to the agent, as long as the seller rescinded the “counteroffer” before it was accepted by the buyer, there would be no contract with the first buyer and the seller could enter into a contract with the second buyer.

Unfortunately, the seller took the listing agent’s counsel and proceeded to rescind the “counteroffer” and sign the second offer. The first buyer promptly hired an attorney, who promptly threatened legal action. The buyer’s attorney reasoned that, when the seller signed the offer, there was mutual acceptance of the terms of the offer, and thus a contract was created. The contract contained a tax parcel number, thus satisfying the requirement for a legal description. Moreover, to be enforceable, a contract requires either a specific price or a mechanism by which a specific price can be determined. Because the offer contained an escalation clause, it probably satisfied this legal requirement as well. This attorney’s reasoning was sound and the seller had a significant legal problem as a result of selling the same house twice.

Thus, the seller was subjected to potential liability on a breach of contract claim by the first buyer (or the second buyer, depending on which contract he breached when he sold to the other buyer). While real estate agents are allowed to engage in the limited practice of law by completing blanks in pre-printed forms, they are not allowed to provide legal analysis or counsel to their clients. In this situation, the agent did just that. If you have a question or concern about your legal rights and obligations at any point in the transaction, you rely on your agent’s input at your peril. An agent, no matter how experienced, is not an attorney and may not give you good — or even competent — advice.

Legal Description, Revisited

Way back in January, I authored a post on the legal description of property. People say that blogging generates business, and they’re right. I recently picked up a new case because an agent read that post and referred his client to me. This new case illustrates the complexity of the legal description issue (which I address below), as well as the dangers associated with relying on an agent — or the internet — for legal advice (a topic I will address in another post later this week).

My original post discussed the general principle that a legal description must be included in a contract for the sale of real property in order for that contract to be valid. The point of the post was to encourage buyers and sellers to include the legal description in the contract from its inception so that there was an unequivocally binding contract upon mutual acceptance. Thus, I did not discuss the exceptions to the general rule. In fact, there are several, one of which is frequently applicable given the format of the widely used NWMLS forms.

A contract for the purchase and sale of land need not contain a legal description if it references another document that contains such a description. Bingham v. Sherfey, 38 Wn.2d 886, 889 (1951). This rule is well established. See, e.g., Sunreal, Inc. v. Pong’s Corp., Inc., 2003 WL 21500730 (Div. 1 2003) (quoting Bingham). In the Bingham case, the contract at issue did not contain an adequate legal description. However, it did contain the tax parcel number for the lot at issue. The Court held that the tax assessor in the particular county presumably performed the assessor’s statutory duty and included a legal description for the property in the tax records. Bingham, 38 Wn.2d at 889. Thus, the Court found that reference to the applicable public record (i.e. the property tax records maintained by the county) “furnishes the legal description of the real property involved with sufficient definiteness and certainty” such that the contract was valid. Id.

The NWMLS form contract contains a space to insert the tax parcel number for the property at issue. Thus, even if the contract does not contain a legal description, it very well might contain a tax parcel number. If it does, then the contract probably falls within the exception created by Bingham, and the contract is binding despite the absence of a legal description.

Admittedly, one could make a counterargument. In Key Design, Inc. v. Moser, 138 Wn.2d 875 (1999), the Supreme Court reaffirmed the legal description rule first announced in Martin v. Siegel, 35 Wn.2d 223 (1949). Key Design, Inc., 138 Wn.2d at 881-84. Quoting Martin, the Court held that “every contract or agreement involving a sale or conveyance of platted real property must contain . . . the description of such property for the correct lot number(s), block number, city, county, and state.” Id. at 881. Thus, in light of this language, one could argue that a tax parcel number is insufficient. However, Martin was decided two years prior to Bingham. Moreover, the Court in Bingham specifically noted that its holding was consistent with Martin. Bingham, 38 Wn.2d at 889. Thus, a court is unlikely to apply a bright line rule to the legal description requirement. Rather, a court will probably enforce a contract that contains the property’s tax parcel number.

Every purchase and sale agreement should include a legal description so that there is no issue. However, if you are going to dispute the validity of a contract on this basis, you need to be aware of the exeptions to the general rule. As I will discuss further in my next post, you should always consult an attorney — directly, not by reference to a blog — before reaching a conclusion about the validity of a contract.

Please note that this post is not legal advice. You should consult an attorney for specific legal counsel.

Website Owners Not Liable for Comments

Considering this issue comes up every time Russ and I speak in front of an audience (including yesterday), I thought it would be interesting to share that the courts have been consistently ruling that blog owners are not legally responsible for the comments on their site, even if they moderate…

It happens all too often that some website owner in the US is sued with claims of libel over comments on that site in an open forum. We usually point to Section 230 of the Communications Decency Act, and note that it’s pretty clear that service providers of such forums are not liable for content they didn’t write themselves. We also like to point to a 9th Circuit ruling, noting that, even when such comments are moderated or approved, the site owner or moderator isn’t responsible. While the Supreme Court later refused to hear an appeal on the case, meaning the ruling really still only covers the 9th Circuit, the ruling is so reasonable, you’d have to hope other courts would agree with the logic. It appears some already are. Tech Law Advisor points us to a few different sources covering a District Court ruling (outside of the 9th Circuit) that comes to similar conclusions (even if the article is improperly headlined). The case involves the somewhat infamous TuckerMax forums, which are known for being a bit on the… free wheeling side of things. Apparently, a bunch of anonymous commenters there were upset about a party thrown by some publicist, and posted some relatively mean comments about him in the forums. The publicist then sued Tucker Max, claiming that he was liable for the comments, even though it was clear they weren’t made by him. The actual court ruling (warning: pdf) is an enjoyable read, as the judge clearly explains why he’s throwing out the case. He even cites the ridiculous number of censors China employs to filter the internet to explain why it’s not reasonable to expect internet site owners to police their forums more carefully — even as he notes that Tucker Max clearly admits to moderating comments on his site. The ruling also refers back to an older ruling pointing out the importance of protecting free speech, even when vulgar. It’s another reasonable ruling concerning these issues. Hopefully, once enough of these pile up, most lawyers will know better than to file such lawsuits.