New Condo Buyers Seeking Out of the Contract: “Whiners” or Respectable Citizens?

There’s been some “buzz” lately about buyers of new construction condos who purchased pre-construction now wanting out of the deal with a return of their earnest money. Motivations vary: they are no longer able to get financing (“WHAT? I need a down PAYMENT!? Since when??”); their life situations have changed (baby + one bedroom condo = problem); or they simply don’t want to be under water the moment they close (those 2007 prices are not so attractive now…). Regardless of the motivation, though, the developer’s response is almost always the same: “Go pound sand. The earnest money is mine.”

Luckily for buyers, there are various federal and state laws designed to protect consumers that may give the buyer a right of rescission (and thus the right to a full return of the earnest money). For example, several decades ago the federal government enacted the Interstate Land Sales Full Disclosure Act (known to its afficionados as “ILSA”), 15 USC 1701 et seq. specifically to protect buyers of new construction. Generally speaking (its a complex statute), a developer must register the project with the Dept of Housing and Urban Development (HUD) and provide buyers with a comprehensive set of disclosures. However, the developer is exempt from the registration and disclosure requirements if it contractually obligate itself to complete the building within two years.

For reasons unknown, many of the new condo developments in the area decided to structure the purchase and sale agreements to fall within this “two year” exemption. Unfortunately for the developers, it is more difficult than first appears, and most of the contracts at issue at least arguably fail to qualify for the exemption. Thus, the buyers of those condos arguably have the right, under ILSA, to rescind the contract and receive a full return of their earnest money. (My partner Marc Holmes and I recently prevailed in an action against WA Square on this basis, so in at least one case its no longer “arguable” — the developer failed to comply with the statute and the buyer had a right of rescission.)

All of this raises an interesting question: Is it unethical for a new construction buyer to seek a legal basis for getting out of the contract with a full return of the earnest money? Our very own Ardell has argued that, if a buyer simply changes her mind about the purchase, the buyer should lose her earnest money. Other people have voiced a similar opinion. Is that right? Is it morally wrong for a buyer to seek a return of the earnest money? Does the buyer’s motivation in seeking to get out of the contract even matter?

I think the answer to that question can be determined by flipping it around. New condo developers are large entities typically owned by sophisticated multi-millionaires. What if one of those multi-millionairre owners signed a contract that required her to perform her contractual obligations two years later, and when the date for performance arrived she stood to lose substantial money if she performed? What if the owner just changed her mind for some other reason? In either case, I think its safe to say that the owner would not perform her obligations. Rather, she would hire a lawyer to identify each and every possible basis for avoiding her contractual obligations. The lawyer would then approach the other party to the contract and see if the parties could reach a compromise. Rich people got rich for a reason: they don’t intentionally make a bad business decision, and when faced with a situation that will cause them to lose money, they hire an attorney to negotiate their way out of it. They use the law in every way possible way to protect and advance their interests.

Which is, of course, the purpose of the law. It only works when it is applied to a particular situation. ILSA was designed to protect consumers. Developers should comply with this law. If they don’t, the law gives consumers the right to avoid their contractual obligations. There is nothing immoral or unethical in using the law to protect and advance your interests. It’s what is expected of every citizen, and its certainly what is done by every citizen who can afford legal counsel. If you’ve decided to not buy that condo –for whatever reason — then you should determine whether the law is on your side. It’s what every person should do — and what wealthy people do all the time.

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

Congratulations to Russ Cofano

This is huge news for a local real estate company… Long-time Rain City Guide contributor, Russ Cofano, recently accepted a position as Vice President and General Counsel at John L. Scott. From an email I received from Russ:

For me, the New Year is bringing a major change. Beginning Monday, January 14, 2008, I am joining John L. Scott Real Estate as Vice President and General Counsel. The decision to leave Bullivant Houser Bailey was a difficult one as this is a truly exceptional law firm. At the same time, my new role at John L. Scott will provide unique challenges and opportunities for personal growth. John L. Scott consistently ranks in the top 10 of U.S. independent real estate brokerages and I am looking forward to helping them in their continued growth as an industry leader.

Russ was clearly instrumental in the early growth of the Rain City Guide community! And for anyone who was around for the early discussions between Russ and Ardell, it was like having a front row seat to a force of nature! I learned a ton from Russ on so many levels and am so excited to have him back “in the industry!”

By hiring Russ, John L. Scott is getting a lot more than just a superb lawyer. They are getting a thought-leader in the world of online real estate!

The Legislature Volleys Back….

Recently, I wrote about new case law in Washington that was making it more difficult for buyers of real property to make post-closing claims against the seller for property condition related matters. The Washington legislature has just amended the state’s residential property condition disclosure law to put additional burdens on sellers and will soon require a disclosure form when “unimproved

The (legal) importance of a home inspection

(This post is not legal advice.  For legal advice, consult a lawyer about your particular situation.)

First, my apologies to the RCG community.  I recently took a lengthy vacation and have been quite busy since my return.  Moreover, I now need to hire additional staff and thus move to a larger office space.  So, please forgive my less-than-frequent contributions until things return to “normal.”

Recently, Russ authored a post discussing the recent Supreme Court case of Alejandre v. Bull (beating me to the punch, in the process).  This is indeed an important case for several reasons, one of which Russ and the subsequent comments touch upon: the importance of a thorough home inspection.

Initially, the home inspection (if performed competently) provides the buyer with information regarding the condition of the house.  Obviously, the buyer is best served having full knowledge of any existing defects and able to make an informed decision about whether to complete the purchase. 

In light of the Bull case, however, the inspection also has legal significance.  In that case, the Court (in paragraphs 32 and 33) noted that a buyer of real property may still have a claim of fraudulent concealment and/or fraud where the seller fails to disclose a known defect (notwithstanding the fact that the buyer does not have a claim for negligent misrepresentation due to the economic loss rule, as discussed by Russ).  To prevail on a claim of fraudulent concealment, the buyer must show that the defect at issue “would not be disclosed by a careful, reasonable inspection by the purchaser.”  To prevail on a fraud claim, the buyer must show that he had a right to rely on the alleged misrepresentation of the defect at issue.  This “right to rely” is “intrinsically linked” (using the Court’s words) to a buyer’s duty to exercise diligence with regard to the representations at issue.  

Accordingly, an inspection is critical to retaining the ability to make a claim of fraud or fraudulent concealment against a seller.  If a buyer skips the inspection, the buyer will have great difficulty showing that the defect would not have been revealed by an inspection.  The reverse is true as well: by getting an inspection that fails to uncover the defect, the buyer will have a very good argument that the defect would not be (and indeed was not) revealed by an inspection.  Similarly, absent an inspection, the buyer will almost certainly have failed to exercise the necessary diligence to identify the defect, regardless of seller’s representation.

An inspection has an immediate, practical benefit.  However, it also has a legal benefit.  If you forego the inspection, you essentially waive any claim against the seller for failing to disclose a known defect.

Are Real Estate Agents Facing Extinction?

[I’m very happy to introduce the newest addition to the Rain City Guide team. Joe Beitey is a real estate lawyer out of the South King & Pierce County areas who runs the EZLawCoach blog and is also the Corporate Counsel for the MLS4Owners website. Joe has been quite active in the RCG community lately and I look forward to reading his legal perspective as a contributor!]

(This article is NOT legal advice. Consult an attorney for any specific legal issues you may have.)

Oh my goodness, what’s with these trends!! Global warming, sub-prime lending putting banks at risk, a slow down in the national housing market (bursting bubble???), and Sweet Mother Mary & Joseph, what’s with this “Zillow thing

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.

Escrow agents and how they protect themselves

When you choose an escrow company (or “closing agent,” the person who does the work necessary to close the transaction), you look for several qualities: competence, service, location, etc. One factor you probably don’t consider is whether the escrow company is willing to be responsible for its own significant errors.

When escrow is opened, the closing agent sends both buyers and sellers a copy of its standard escrow instructions. These instructions supplement the purchase and sale agreement and instruct the agent as to how the transaction should be closed. There appear to be only a handful of templates used by the many different escrow companies, as it is very common to see the same set of instructions regardless of the escrow company. In the vast majority of those instructions (perhaps 85-90%), there is a little-noticed sentence, typically in the “Disputes” paragraph: “The parties jointly and severally agree to pay the closing agent’s costs, expenses and reasonable attorney’s fees incurred in any lawsuit arising out of or in connection with the transaction or these instructions, whether such lawsuit is instituted by the closing agent, the parties, or any other person.” The exact language of this sentence may vary somewhat, but the gist is the same: if anyone sues the closing agent for any reason, buyer and seller will be responsible for the closing agent’s attorney’s fees and costs.

The effect of this language is to insulate the escrow company from any liability that arises out of the closing agent’s negligence. Say, for example, the closing agent neglects to pay off an existing lien on the home. When buyer takes title, the buyer will now have to deal with this lien that was incurred by the seller. A reasonably prudent closing agent would have insured that all liens were satisfied at closing, and the agent’s failure to do so probably constitutes negligence. Under normal circumstances, the agent (and escrow company) would be liable to the buyer for the harm caused by this negligence. However, if the instructions contained the above language, the agent almost certainly will avoid liability. Why? Because if buyer were to file suit against escrow in this situation, buyer would be responsible for paying escrow’s attorney’s fees and costs in the lawsuit. As anyone who has used an attorney to defend them in litigation knows, attorney’s fees can be very, very expensive. Thus, the above language is an incredibly strong disincentive to seeking compensation from escrow, even in those instances where escrow’s negligence causes harm. I believe this is simply not fair to the buyer and seller.

In my experience, most (but not all) escrow companies are willing to modify the above language so that it does not effectively bar a suit against escrow based on escrow’s negligence. It’s certainly an issue you may want to address when deciding which escrow to use in your transaction. Needless to say, an attorney can quickly negotiate a change in these instructions on your behalf. [This post does not constitute legal advice. Consult a lawyer regarding your particular situation.]

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.

Russ on Listing Copyrights

RCG contributors have been all over Inman News lately…

Today Russ is giving his opinion on two papers recently released by MRIS (Washington DC MLS) that have to do with the copyrights that agents have on listings.

The general thrust of the reports are that real estate agents should assert the copyright on their listings:

“Our intention with this discussion paper is to remind those that can lawfully assert copyright rights that they have legitimate recourse at their disposal if they feel their rights are violated,” the paper states.

Issues related to the copyright, control and ownership of property listings information have been debated for many years within the real estate industry, and there has been an increasing focus on these issues, the paper states, that has created “robust” and “at times contentious” discussions about the present state of the business and the future of the industry. Among new entrants to the industry are “alternative business models that propose to dramatically change the real estate industry,” as well as “new offerings from existing industry participants that may also impact the way the industry thinks about — and practices — real estate,” according to the paper.

Russ is not convinced that agents have all the rights that the paper asserts:

(Russ) said he “completely” disagrees with the perspective in the report that the listing price of a property is copyrightable, for example. “It’s the seller who typically comes up with (the listing price) and not the agent,” he said. “If it was copyrightable it would be copyrightable to the seller. In my opinion the argument does not have legal authority to back it. If challenged in court I believe that the court would find the listing price is a fact as opposed to a protectable element.” The listing price, as far as consumers are concerned, is definitely a very important aspect of property listings information, he said.

This is an interesting argument and at the root of the DOJ case against NAR that is currently working itself through the legal system.