Author Archives: Craig Blackmon

About Craig Blackmon

I am an attorney in Seattle, where I have practiced real estate law for over a decade. I own and operate my law firm, Seattle Property Lawyer, where I help people buy and sell homes without an agent (plus handle other legal issues relating to owning a home). I maintain the FSBO Law Center a web site for "for sale by owner" sellers and buyers. I am a licensed real estate broker and innovator in the real estate industry.

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

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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.

I just bought a new high-end condo! Nothin’ but air!

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There’s been a lot of buzz lately about buyers of high end new condos looking to get out of a deal they signed at the height of the bubble. My firm has been lucky enough to be able to help out some of these buyers (my next post will focus on whether small buyers are entitled to use any legal leverage necessary to extricate themselves from a bad business deal — like any big developer would — or whether buyers should “accept the consequences” of their actions and just write off the earnest money).

In handling these cases, we’ve come to appreciate the “new” model for high rise condo development. First, though, some background about the “old” model for condos (and you condo experts please forgive me for a general discussion of the issue that does not apply to all condos — there are many variations — but which provides background for my larger point). When you purchase a condominium, you are buying the exclusive right to use a particular unit. You typically own this unit exclusively from “the paint in” — i.e. the unit and all its fixtures are yours to use as you please.

However, the walls, the structure, and even the land itself is owned by ALL of the owners as a common element. In other words, if your unit constitutes 1% of the total building, then you also own 1% of the whole common building (i.e. excluding other units) AND the dirt on which the building sits. The remaining owners own the remaining 99%, with each ownership share correlating to the size of each individual unit. So, even though you bought a condo and not a house, you still own — with others — real property, dirt, your own very small piece of planet earth. Because every piece of real property is unique — there is no other one exactly like it anywhere — and because humans are earth-bound (generally speaking, at least in terms of everyday living) real property has always been considered a good long term investment.

So what’s new? For various reasons (to allow for a hotel within the building, to allow the developer to retain an ownership interest in the property, etc.), large condo towers these days (such as Washingto Square Towers in Bellevue, Olive 8, and several others) are built “on” air, detached from the earth. If you bought one of those condos, you don’t own any dirt at all — only the building and airspace above the ground. Say WHAT?

Here’s how it works (again speaking generally — every project differs in the details, I am sure). The developer will create two parcels: a parcel on the ground, up to a certain height, and an “airspace” parcel above that. These are separate legal parcels, each with their own Parcel Number. The condo will be built in the “airspace” parcel. Owners will have an easement across the “land” parcel to guarantee access to their home in the “airspace” parcel above. I guess this could be described as a “man’s castle in the sky”.

I own a condo, and I take some comfort in knowing that I own dirt. The dirt will have value (unless/until we arrive at some “Mad Max” style future) regardless of what catastrophe strikes my condo. Presumably, my fellow owners and I will always have the option of selling that dirt to someone else (it would probably require 100% agreement and so its very unlikely, but it is at least theoretically conceivable). But what if you own only air detached from the dirt? Well, it seems to me you’ve got something much less valuable. And kinda weird too — who wants to live in an “airspace” home?

When is Foreclosure Right for You? Part 2 of 2

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This post is not legal advice. It is a general discussion of SOME of the relevant legal issues surrounding foreclosure. If you are considering or facing foreclosure, you need specific legal advice for your particular situation. Consult an attorney in your area.

In my last post, I discussed the difference between a judicial and a nonjudicial foreclosure, which is one of the two essential issues to understand when considering whether to allow your property to go into foreclosure. The other essential issue concerns the number of mortgages you have on the property.

For many reasons, people often took out a first and a second mortgage when they bought property. Others opened up a home equity line of credit which they then used to pay other bills. In either case, the owner has a first and a second mortgage on the property. Where there are two mortgages, foreclosure creates much greater risk.

First, some background: mortgages, like all other liens, are arranged by seniority. (A “lien” is a legal right to force the sale of particular property to repay a debt, whether on a mortgage, unpaid property taxes, an unpaid contractor’s bill, etc.) As a very general rule, seniority is determined by time; the older the lien (i.e. the longer ago it was created or placed on the property), the greater the seniority. The “first” mortgage (or any other lien) — known as “first position” — will be paid in full by the sale of the property before the second and all subsequent liens are paid. The second will be paid in full before the third and all subsequent liens are paid. The third will be paid in full before the fourth, and so on. So, in a market like this one, the only debtor who has any real chance of being repaid in full is the mortgage or other lien in first position.

Where an owner has two mortgages, one is senior to the other (usually in first and second position on the property). Typically, when an owner stops making payments on these mortgages, the first position mortgage will foreclose. By foreclosing, the first position mortgage (under authority created by the deed of trust) forces the sale of the property and the proceeds (after payment of costs) are used to satisfy the debt. If there are any remaining funds (very unlikely in today’s market), they are applied to the second position mortgage and then to the remaining liens in order of priority.

Now, here is the important part: foreclosure extinguishes the debt that is being foreclosed, but it does not extinguish the junior debts (such as a second mortgage). So, if the lender forecloses the first mortgage and the proceeds are insufficient to pay the total amount due, the balance is extinguished as a matter of law (with certain tax implications — perhaps the topic of a future post). In other words, even though the debt was not repaid in full, the debtor is off the hook and does not need to pay the difference on the first mortgage.

However, the debt of the second mortgage survives. Admittedly, the second lender can no longer foreclose on the property because the legal right to do is extinguished by the foreclosure of a senior debt. The problem for the owner, though, is that he still owes the money borrowed under the second mortgage. In WA, you have six years in which to sue for breach of contract. The owner/debtor’s failure to make payments on the second mortgage (per the terms of the promissory note) constitutes a breach of contract. So, after foreclosure of the first, the second lender will have six years in which to sue the debtor for the full amount of the debt. The debtor will probably lose that suit. At the end of that process, the lender will have a judgment against the debtor for the full amount of the balance due, plus interest and late fees, plus attorney’s fees and costs incurred by the suit. Judgments are bad (see Part 1).

So, if you’re thinking about foreclosure, you’re taking a very big risk if you have multiple mortgages. You could get a very, very unpleasant surprise five years later. At that point, bankruptcy may be the only viable option.

When is Foreclosure Right for You? Part 1 of 2

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This post is not legal advice. It is a general discussion of SOME of the relevant legal issues surrounding foreclosure. If you are considering or facing foreclosure, you need specific legal advice for your particular situation. Consult an attorney in your area.

Practically every day, I get a call from a potential client wondering what to do with a property that is seriously “under water.” A property is under water where the owner owes more on the mortgage(s) than what the property is worth in today’s market. The problem can be compounded by high mortgage payments (in the go-go market of yesteryear, it was not uncommon for someone to buy “more house” than they needed in the hopes of continued double-digit appreciation — the more expensive the asset, the greater the total appreciation). At least once a week, I speak with someone who has mortgage payments of $3000+ per month, where they could rent a suitable place for half that and they owe $50,000+ on the property beyond what it is worth.

So what to do? It’s been the topic of some discussion. One option is to hunker down, bite the bullet, and wait for the market to bounce back. After all, you’ve got to live somewhere. Eventually, the market will start going up and some day you’ll regain equity in the property (equity = value in the property greater than what is owed on it). However, depending on when you bought and what you paid, it may be a loooooooooonnnnng wait…. In the meantime, you’ll keep making those big mortgage payments.

Some people wonder whether they can just walk away from the property and be done with it. The usual plan: Let it go to foreclosure, temporarily ruin your credit, and start saving the difference between rent and the mortgage. To determine whether this is a good idea — or, more accurately, to get an idea as to the risks and benefits of doing so — you must first understand the difference between a judicial foreclosure and a nonjudicial foreclosure. [Author’s Note: This post is written for residents of Washington State. If you live somewhere else, your laws may differ. Yet another reason to consult an attorney.]

First, some background: When you bought the property, you borrowed money from a lender. In doing so, you signed two key documents: a promissory note, and a deed of trust. The promissory note is the legal document that sets forth the debt and the terms of repayment. The deed of trust is a type of deed (a document that transfers title to real property). Under a deed of trust, you transferred title to the property to a trustee, who “owns” the property for the sole purpose of guaranteeing that you repay the debt as set forth by the promissory note. If you fail to pay the debt, the trustee has the power to sell the property without your permission so that the proceeds of the sale can be used to repay the debt.

Now, the two types of foreclosure: A judicial foreclosure is a civil action filed in court by the lender. The lender sues for payment of the debt reflected by the promissory note. The process takes 12+ months and is expensive. At the end of the process, the court will order the sale of the property, the property will be sold at public auction, and the proceeds from that sale (after costs incurred) are applied to the amount owed. If there is a balance remaining on the debt, that difference becomes a judgment against you. This is a “deficiency judgment” because it is a judgment for the deficiency between the amount paid (via the sale) and the amount owed. A “judgment” is a court order requiring a person to pay a specific sum, and if not paid immediately it accrues simple interest at 12% until paid. A judgment expires 10 years after it is entered by the court, but it can easily be renewed for another 10 years. Once a creditor has a judgment, the creditor can use various legal tools to extract payment from the debtor without the debtor’s consent. For example, the creditor can garnish the debtor’s wages (the employer pays a portion of the wages directly to the creditor) or garnish the debtor’s bank account (the bank disburses the funds in the account directly to the creditor). It is safe to say that judgments are bad. So, one should avoid a judicial foreclosure.

The other type of foreclosure is a nonjudicial foreclosure. With this type of foreclosure, the trustee orders the sale of the property under the authority conferred on him or her by the deed of trust. Once again, the proceeds (less costs of sale) are applied to the debt owed under the promissory note. This process is quicker and cheaper than a judicial foreclosure. However, a nonjudicial foreclosure extinguishes the debt set forth in the promissory note, even if the sale does not net enough to repay the debt in full. There is no possible deficiency judgment. Thus, with a nonjudicial foreclosure, the debtor knows that he or she will not owe anything following the foreclosure, regardless of whether or not the lender is repaid in full following the sale.

Obviously, then, foreclosure may make sense if the lender foreclosures nonjudicially, but probably does not make sense if the lender forecloses judicially. Which will happen to you? Unfortunately for debtors, lenders do not advertise in advance which method of foreclosure they intend to use. That said, the vast majority of foreclosures are nonjudicial. A judicial foreclosure would make sense for a lender if the debtor has other assets that can be used to satisfy the deficiency judgment. If the debtor has no other assets, then they are “judgment proof” (a term used to describe someone who simply has no money to satisfy a judgment, thereby discouraging anyone (including a lender) from incurring the costs of a lawsuit). Where the debtor is judgment proof, it makes no sense at all for the lender to incur the costs of obtaining a judgment.

So, if you’re willing to assume the risk of a judicial foreclosure, and/or you have no assets whatsoever such that you are comfortable being judgment proof, then it may make sense to just walk away. [Note: you’ll have a hard time getting credit, finding a landlord, or otherwise living in the modern world if there is an unpaid judgment against you.] However, this is only ONE of the TWO key factors you need to consider. Stay tuned for Part 2.

Does every buyer or seller need an agent? Does every distressed homeowner need an attorney?

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In the comment thread to a recent post, Ardell wrote:

You can’t just tell people they should or should not have an attorney the same way that you can’t tell them they should or should not have a real estate agent LOL! Either can be a waste of money if you have the wrong agent or attorney. If the agent is not going to help you value the property you are buying…if the lawyer is not going to advise you regarding release from the deficiency…either is a waste of time if they are just shuffling papers around. Every buyer and seller should have an agent the same as everyone facing default should have an attorney.

This raises an interesting question: Are agents and attorneys comparable in terms of the services they provide? And more to the point: Are they equally important in protecting a person’s interests?

I think not. Now some may quickly accuse me of being a “typical” ego-driven attorney with an overinflated sense of self worth. But rather than attacking me personally, the more discerning reader will respond to the merits of my argument.

Similarly, I suspect there is a lot of common ground between agents and attorneys — more than a reader might realize. For example, everyone agrees that there are poor agents as well as poor attorneys, and hiring either one will either be a waste of money outright or will get you a poor return on your investment (money spent on service when compared to benefits of receiving service). Moreover, there are always exceptions to every generalization, so specific examples are not very useful in addressing general issues. So, for purposes of this post, let’s focus on a “generic” competent agent — i.e. the abstract, non-specific “everyperson” agent — compared to a similar competent attorney.

So why do I think that an attorney is more important? Or, as Ardell framed the issue, why do I think that people should not have an agent when buying or selling a house, but they should have an attorney when facing foreclosure? The analysis begins with recognizing the different skill sets of each professional. Practically speaking, an attorney must have completed both college and law school, a three year graduate degree. The attorney must also have passed the bar exam, which is recognized as quite demanding. In contrast, an agent must have completed a 60 clock-hour course offered at most community colleges and passed the state license examination. Both professionals must undergo continuing education, so presumably once the career is started they grow professionaly at the same rate. But is there really any question that the attorney is better educated (and thus has the prerequisite intelligence and diligence necessary to complete seven years of advanced schooling)? Furthermore, given these vastly disparate educational requirements, can anyone dispute that the practice of law is more complicated and more intellectually demanding than the brokerage of real estate?

Consideration should also be given to the actual work expected of the two professionals. Again, as Ardell framed the issue, an essential task expected of an agent is valuation of the property at issue. A property’s “true” value is unknown until a willing buyer and a willing seller agree on a price, neither being compelled to do so. Until that time, any estimate of a property’s value is just that, an estimate. This estimate is based on many factors, most of which can be obtained and understood by any competent adult — i.e. sales data and current prices for similar homes in similar areas. Everyone will have a different opinion, even between two agents with the same amount of experience. There is simply no way to confirm that any reasonable valuation — from anyone — is “right” or “wrong” until the property sells.

In contrast, when faced with acute (or chronic) financial distress, there are different strategies that may be employed to address the problem. All of these strategies require an understanding of the debtor’s legal rights and obligations. In comparison to valuing a property, it is much more difficult for a person to do the necessary research (federal statutes, state statutes, cases interpreting both) that will allow the person to reach an informed and correct conclusion. Moreover, an error in valuation is likely to be small as there is a range of “right” answers anyway, and if the buyer/seller formulates their own number and then gets that number, the outcome at least in the short term is good. In contrast, there are many different options that may be available to the debtor. The option chosen by the debtor — after researching the issue himself — may be, in fact, a very poor choice in the near and short term.

Finally, I must also note the costs incurred in using the services of either an agent or an attorney. At least in the realm of residential real estate, I would wager a lot of money that agents are actually more expensive than attorneys. In a “typical” transaction, a consumer will pay his agent (including the broker required for the agent’s license) $12,000 (3% of a $400k house). This is a substantial bill for the services provided, particularly in light of the requirements for becoming an agent. In contrast, even if the consumer files for bankruptcy, he is unlikely to incur such a bill with a lawyer. If the debtor is simply consulting the attorney for options, the bill will be much, much less.

In summary: a consumer need not hire an agent in all circumstances. Look at the services you hope to receive and the value of those services in light of the cost incurred, taking into account the licensing requirements of the professional providing those services. By considering the licensing requirements, a consumer addresses the merits of hiring the professional versus performing the work on the consumer’s own behalf. However, a homeowner should always consult a lawyer when faced with default on a mortgage — or when faced with any other legal issue involving hundreds of thousands of dollars of liability. If cost is an issue, then there are free legal services and low cost services available. Regardless, the money will be well spent. The same is not necessarily true of an agent.

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When your financing evaporates, do you lose your earnest money?

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This is not legal advice. For legal advice, consult an attorney, not a blog.

In this challenging market, many buyers are discovering that their loan program is no longer available. This is a particular problem with new construction, whether condo or house. The buyer signed a purchase and sale agreement (PSA) several months or even years ago. Back then, in the “good ol’ days,” lenders offered a variety of financing options. Some buyers relied on some of the more “aggressive” options (e.g., an option ARM) in order to qualify for the new home. Today, that financing option is gone, gone, gone, and the buyer can no longer afford to buy the property. What happens then?

Well, the short answer is that the buyer loses the money. In almost every new construction contract, the builder’s addendum will note that the financing contingency, if any, is waived within several weeks of signing the PSA (and months or years before closing). Once the financing contingency is waived, then the risk of a failure of financing rests squarely on the buyer. At that point, if financing fails, it is the buyer’s problem, not the seller’s. Accordingly, if the buyer cannot close as a result, then the buyer will lose the earnest money as the buyer is in default of the PSA.

However, there may be more to the contract than what is seen by the untrained eye. There are a variety of state and even federal laws that apply to the sale of property, and in particular new construction. In many instances, these laws create “loopholes” in the contract that allow the buyer to at least arguably rescind the contract. Thus, depending on the terms of the PSA at issue, these laws can be used to exert negotiating pressure on the seller to at least return some of the earnest money.

Certainly, a buyer should not rely on these laws when signing the PSA originally. Every buyer should be aware of the risks and obligations created by a contract. But sometimes, the buyer’s situation changes (to put “America’s Money Crisis” mildly) and the buyer can no longer perform. Heck, sometimes the buyer may just decide that the purchase is actually a bad idea and not want to complete it. Under those circumstances, the buyer should consult an attorney to determine if there is a mechanism by which the buyer can get some or all of the earnest money back.

Has the Distressed Conveyances law curtailed foreclosure rescue scams?

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In this Sunday’s Seattle Times there was an article on “foreclosure rescue scams.” I found the timing interesting given the recent enactment of the Distressed Conveyances law effective in June of this year. This law was specifically enacted to curtail these practices and even provides a rather large “stick” to use in convincing people that they should not lure owners into such transactions (in the form of punitive damages of up to $100,000).

Does anyone have any insight into whether these scams continue unabated? Unfortunately, I have no direct personal insight into the issue. [CAUTION: Plug Ahead.] Although I offer a very affordable consultation that is well-suited for anyone who has been approached by a “rescuer,” I have yet to generate much business. So, I really have no idea whether the new law is having the desired effect. Unless the Seattle Times is behind the curve, it would seem that the new law has yet to achieve the desired impact (i.e., make this practice less common).

Buying without an Agent — the Epilogue

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This is not legal advice. For legal advice, contact an attorney.

Over the last year, I’ve posted several times on using an attorney — rather than a real estate agent — to purchase a home. As discussed in those posts, one of the biggest challenges in doing so is getting access to the properties that you may be interested in purchasing.

I am currently working with a couple looking to purchase their first home together. The did their homework — they searched the listings on the web and looked at numerous properties before deciding to make an offer. I asked them about their experience and if they had any difficulty. They told me that they actually looked at perhaps 10 homes (as opposed to the “drive-by”), and in only one instance did they have any trouble. In that case, they got the old “that’s not my job” reply from the listing agent when they called to schedule a viewing. In every other instance, the listing agent either met them at the property or, in several cases involving new listings, allowed my clients to attend a brokers’ opening (at my clients’ request).

So, if you’re thinking of going this route and saving some money in the process, it appears that listing agents are coming around to at least tolerating this approach. A 90% success rate seems pretty good. I guess the times, they really are a-changin’…

When to sue for an undisclosed defect

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This post is not legal advice. For legal advice, consult an attorney, not a blog.

You just bought a house! 🙂 Congratulations! You just discovered that foundation is cracked, although the seller said the foundation was fine… 🙁 My condolences…

The next logical question: can you get some recovery from the seller given his failure to disclose and/or concealment of this defect? The absolute first step in answering that question is to determine the amount of money it will cost to fix the problem. There is only one certainty in litigation: it’s expensive. Where the cost to fix the problem is less than the amount you would expect to incur in attorney’s fees and costs, it may very well be in your best interest to bite the bullet and pay for the repair without seeking compensation.

Let’s assume your cracked foundation will cost $50k to repair. That is more than enough to seriously consider threatening and possibly proceeding with a lawsuit. The next step would be to consult an attorney who could analyze your facts and render an informed opinion as to the likelihood of your prevailing. If you’ve got “good facts” (e.g., seller affirmatively represented condition of foundation, crack appeared to have been purposefully concealed, you performed your own inspection that did not identify the crack), then it may be time to take the very serious step of suing the seller (assuming he refuses to compensate you voluntarily).

But what about those attorney fees? They will still eat up most, if not all, of what you seek to recover. (In the case of Stieneke v. Russi, which I discussed in my last post, the cost of repair was $72k, but the attorney fees and costs through appeal were $175k.) Will you be able to recover those from the seller too?

The answer to that question is a very definite “probably” — hardly the assurance you are looking for. Some courts (particularly those in Eastern WA) have determined that this type of claim (fraud) is unrelated to the contract for sale, so that even though the contract contains an attorney’s fees clause (which allows for an award to the prevailing party), no fees are available. Other courts (particularly those in Western WA) have determined that, because the contract is central to the dispute, the attorney’s fees provision would apply. Given this degree of uncertainty in the law, there is a chance that you may win but still end up losing money given your legal costs.

One final note: the attorney’s fees clause in the contract, if it applies, cuts both ways. So, if you sue and lose, you very well may be liable for the seller’s legal fees and costs, in addition to your own. In that case, your total cost for the unsuccessful suit could approach $100k, even if you don’t appeal. Accordingly, it is essential to get good legal advice about the merits of your case and the likelihood of prevailing before filing suit.

Form 17 — an addendum to the contract?

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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.]