Agent & Buyer Primer on Title & Warranty Clause Changes

Contracts used by Realtor® associations on the Virginia peninsula (and the entire state, I think) provide several important clauses relating to the quality of title a seller is obligated to deliver to the buyer, and the type of deed (warranty really) by which the seller will transfer and guarantee title to a buyer.  As a result of the economic climate more and more sellers are institutional sellers.  More often than not these institutional sellers want to limit their liability because they only owned the property for a short period and acquired it under adverse or unusual circumstances.  This primer is intended to answer the FAQ’s I get as a result.

As you read through the FAQ questions and answers, or seek to determine the answer to your particular question, please bear in mind two factors:  first, you should only accept a deviation from the standard and customary contract title language and deed warranty when you have an institutional seller (and really want the house despite the risk) – there is simply no reason why you should accept these changes with a different category of seller; and, second, a primer is no substitute for a face to face meeting with me or any lawyer so this is to be considered a guide, not legal advice applicable to any given situation and set of facts.

What does “marketable title” mean?

 Title simply means ownership.  While the Virginia Supreme court’s definition is actually more complex, it has said in part that “marketable title” is one which a reasonably well-informed and prudent person, acting upon business principles and with full knowledge of the facts and their legal significance, would be willing to accept, with the assurance that he, in turn, could sell or mortgage the property at its fair value.  In layman’s terms, it is good title, and there are no problems that would affect your ability to re-sell it.

What does the VAR contract language “render the title unmarketable” mean?

I’m not sure why VAR couldn’t have taken the normal approach and just said “marketable title” like the rest of the world but I suppose the phrases are functionally equivalent in context (technically the VAR contract carves out possible exceptions and problems, like easements, and says they are okay as long as they do not render title unmarketable).

What does the language insurable title mean?

Simply stated, insurable title is title that a title insurance company will insure.  Note, however, that title insurance companies might insure against defects that would render title unmarketable.  An old, unreleased, deed of trust is one example (not a good one perhaps because they will rarely insure over unreleased deeds of trust, but you get the point -- and for enough money they will insure anything I suppose).  This is complicated because a title policy can contain exceptions, which raises the question whether it is “insurable” if a policy is issued but contains exceptions that are unmarketable in nature.

What does the REIN contract language “marketable and insurable title” mean?

Ah, the best of both worlds: add the answers above and you get this one.  Kudos to REIN.

Is it okay if the seller’s addendum removes or changes the marketable title language?

Honestly no.  If this is changed in the contract the buyer is obligated to buy even if title is bad.  If the seller just flat out refuses to bend on this deal point, and the buyer just has to have the property, then you have three choices: (a) take significant risk, (b) do a title search and get a title insurance binder (a binder is a written promise to insure) before the contract is ratified (or during a contractual due diligence period) – but problems could still come up between the search and then closing and so that should be covered as well, (c) try and counter with a counter/addendum expressly providing that if title is not “clear, marketable and insurable then either Buyer or Seller has a right to cancel the contract.”  With this language the seller is not at risk of being in breach should there be a problem but the buyer is also protected.  Honestly, if a seller won’t accept that you just need to walk away.

Is it okay if the seller’s addendum removes or changes the insurable title language?

All marketable title should be insurable (however, not all insurable title is marketable).  Note, however, that both the REIN and VAR contracts have exceptions for easements, etc. and so title could be contractually marketable, but not insurable because a title company might not insure where such contractually excluded matters like certain restrictive covenants, easements, etc. are present.  If financing is a contingency the buyer might have an out if a lender’s title insurance policy cannot be issued.  To answer the question then: I seriously question why a seller needs to remove language at least promising “insurable title” – think about the significance of that.  A middle ground is a counter/addendum expressly providing that if title is not “clear, marketable and insurable then either Buyer or Seller has a right to cancel the contract.”  With this language the seller is not at risk of being in breach should there be a problem but the buyer is also protected.

Is it okay if the seller’s addendum removes the marketable title language and replaces it with insurable title language?

Not quite a mortal wound since insurable title offers some protection for a buyer.  But as noted above they are not the same.  I would try the counter and options described in the FAQ regarding removing it entirely.

What does the word “warranty” mean when it is used to describe a deed?

Same definition we give to it when we use in the context of other warranties, e.g. a car warranty.  It is a promise, a guarantee.

What is a general warranty deed?

A general warranty deed seller warrants (promises or guarantees) that he holds clear title to the property and has a right to sell it.   This warranty covers all problems created back in the chain of title (as opposed to the special warranty’s promise only that the immediate seller has not created a title problem).  So, if a title problem arises the buyer would have the right, even years later, to sue the seller for breach of warranty, and in some circumstances force the seller to cooperate in getting the problem fixed.  Note that deed title warranties do not cover condition of the property.

What is a special warranty deed?

A special warranty deed seller warrants (promises or guarantees) only that he has not created a title problem (as opposed to the general warranty’s promise that no one has).  Obviously then general warranty is better than special warranty.   One can later convey by general warranty even though title was taken with special warranty (or even with no warranty, see quitclaim deed below).  So, if a title problem later arises the buyer would have the right, even years later, to sue the seller for breach of warranty but only if the seller created the problem.  Fiduciaries (e.g. trustees) should always convey by special warranty and the contract should so reflect (and the VAR contract, unlike the REIN contract, has language to that effect).  Note that deed title warranties do not cover condition of the property.

How does a special warranty deed differ from a general warranty deed?

Whereas a general warranty seller’s guarantee covers all problems created back in the chain of title, a special warranty seller only promises only he has not created a title problem. 

Is it okay if the seller’s addendum changes the contract from general to special warranty deed?

I would prefer, as should you, that it be conveyed by general warranty, but yes I think that is an acceptable risk.  General warranty is better of course as noted above, but if the buyer purchases an enhanced owners title insurance policy then the buyer should be okay.  Remember the deed warranty gives you a right to sue for breach of that warranty, but since a lawsuit isn’t always the best remedy around (turnip sellers, sellers cannot be found, etc.) having a financially sound title insurance company to pay or defend a claim (or fix the problem) is a pretty good remedy.

What is a quitclaim deed (note, it is not “quickclaim”)?

A quitclaim deed is one where the seller makes no promise or warranty whatsoever as to title.  In effect, the seller says that he isn’t promising whatsoever that he has any interest in the property but that if he does own an interest you have it.

How does a quitclaim deed differ from special and general warranty deeds?

In the nature of the warranty or guarantee as to title – whereas special and general warranty deeds have a title guarantee the quitclaim deed has none whatsoever.  Think of the three of them as general warranty deed, special warranty deed, and no warranty deed (quitclaim).

Is it okay if the seller’s addendum changes the contract from general warranty to quitclaim deed?

Not really (and definitely not if the seller is also making changes to the quality of title at closing language unless the buyer personally meets with a lawyer and understands what she is doing).  But like the answer to the special warranty change question if the buyer purchases an enhanced owners title insurance policy then the buyer should be okay.  I just would really go on high alert, and so should any buyer, when there is a seller who wants to convey by quitclaim deed.

What is owner’s title insurance?

Title insurance is insurance, just like any other insurance, except that here it insures against defects in ownership.  A policy of title insurance is like a pre-paid legal agreement: the title insurer will provide legal defense against challenges to the buyer’s insured title (dependent, of course, upon the type of policy coverage) and will reimburse the buyer financially for losses due to covered defects in the buyer’s ownership rights. An owner's policy insures buyers that the title to the real estate is free from all defects, liens and encumbrances except those that are listed as exceptions in the policy or are excluded from the policy’s coverage.  It also covers losses and damages suffered if the title is unmarketable. The policy also provides coverage for loss if there is no right of access to the land.  These are the basic coverages and an enhanced residential owner's policy can be purchased that cover additional items of loss.

If I get owner’s title insurance am I protected?

About as protected as you can possibly get, particularly with an enhanced title insurance policy.  I highly recommend it.  If you ever have a loan officer or lender tell you that an owner’s policy is not needed (so you can save some money) you ought to ask them why then they require you to pay for a (lender’s) policy to protect them.  If you ever have a real estate agent tell you an owner’s policy is not needed you ought to get that in writing so you can later sue them (does not need to be in writing, it’s just that the evidence of the bad advice is better).

Doesn’t the lender’s title insurance policy protect me?

No.  It is called a lender’s policy because the lender is the insured, not the buyer, which means the buyer has no rights whatsoever under that policy.  Many people think that if a lender’s policy pays the note will be paid and so the loss will not be that great and so they are somewhat protected.  This is misguided and wrong for several reasons.  First, an owner is not compensated for the equity in the property.  Second, even if the lender’s policy “pays off” what in effect happens is that the title insurance company will buy the note from the lender.  So even then the buyer is not helped because the title insurance company steps into the shoes of the lender – who has an unpaid note from the buyer – and they can insist a buyer pay regardless whether the collateral for the loan has been lost or not.  Besides, a lender’s policy only insures the deed of trust securing the note, not the fee simple title a buyer would be concerned about, and so there are many different coverage provisions.

I’m so confused, what do I do?

Call me at 757.595.5655 or email me at bdlytle@lytlelaw.com where I may or may not provide you with an FAQB -- Frequently Asked Question Bill (:

My Aunt Frieda

I am asked disclosure questions at least once a week, so let’s just review the basics in this post:

Va. Code § 54.1-2131(B) requires listing agents to disclose, in writing, to prospective buyers, material adverse facts pertaining to the physical condition of the property.  So, your disclosure calculus is always as follows:

1. Is it Physical Condition?  This is usually pretty easy.  Now includes physical condition of the land e.g. drainage, not just the improvements e.g. the house.
   
2. Is it Material? Would it cause a reasonable buyer to make a different decision with regards to the contract, price, etc.?  Recall a jury decides this.
   
3. Is it Adverse?  You really wouldn’t be worried if it was a good thing would you?
   
4. Is it a Fact? A fact is something that can be proven true or false.  Note that an opinion may be considered a statement of fact if the opinion suggests a fact exists.  This can be tricky, e.g. two termite letters.
   

So, I simply work through these for each and every disclosure question.  Remember they must be facts actually known by the agent, and you are only obligated to disclose to prospective buyers.  If all answers are yes, then disclose.

A simple mnemonic will help you remember 1 through 4: Please Call My Aunt Frieda. 

But please call your Auntie Supervising Broker if you are unsure.

Brian, a friend of mine has power of attorney for her incompetent mom. Can she transfer the house to herself and then sell?

Probably not.  This question raises several important points regarding powers of attorney.

First, we need determine whether the power allows the attorney-in-fact (the donee of the power) to act during the donor’s incompetency (disability).  In  Virginia a power of attorney does not survive disability unless it specifically says it does (which is why you’ll see such powers sometimes called “durable” powers of attorney).

Second, the attorney-in-fact is a fiduciary.  The Virginia Supreme Court says that in such a situation “any transaction to the benefit of the "[fiduciary] and to the detriment of the other is presumptively fraudulent” and that “the burden is on the [fiduciary] to overcome the presumption of constructive fraud by clear and convincing evidence.”  This is referred to as self-dealing.

That is tough language, and as a result a title insurance company will be loathe to insure title where this has occurred in the chain.  It is possible, of course, depending on the specific facts and the specific language of the power to overcome the problem, which is why the answer is not an outright no.

Please be careful where there has been such a transfer (or will be) and have the client get legal advice beforehand.

I’m here if you need me.

Confidential or Not?

Suppose you have a listing where there is a material adverse fact pertaining to the physical condition of the property.  A bad furnace, for example. You rightly discuss this with your seller and advise the seller you are required under Va. Code § 54.1-2131(B) to disclose it to prospective buyers.

Your seller, furious, demands that you not do so.  Again, you explain that you are obligated to do so, regardless whether he gives permission.  An argument ensues; the seller fires you, and you decide to let the seller out of the listing rather than dealing with him.

Much to your chagrin you soon see the property listed by another agent at another firm (at that lower price you suggested no less!).  Curious (and more than a little irritated), you pick up the phone and call the other agent and ask whether the agent is aware that the furnace is broken and is disclosing it to prospective purchasers. The new agent, now with actual knowledge, informs the seller that she too will now need to disclose (ah, sweet revenge).

Upon learning of your treason the seller furiously and gleefully files a Code of Ethics and VREB complaint on the ground the information was still confidential and you had no right to disclose it (to a non-buyer).

What is the result?  My thoughts are here.

Brian, three brothers inherited property. One brother wants to sell his share to one brother. Does the third brother have to give permission?

The short answer is no, no permission is necessary. This question illustrates a couple of different principles.

The first principle is the nature of property passing by way of will or intestacy (no will).  Whether heirs take title via a will (if by will they are rightly called devisees) or by intestacy (rightly called heirs) they take and hold title as tenants in common without right of survivorship.

The second principle is the nature of a tenancy in common.  Tenants in common hold an undivided fractional interest in the whole (that is, the property is not actually split into smaller chunks, which is possible – consider 60 acres split into three 20 acre pieces).

 So, in our example each brother took an undivided one-third interest.  That one-third interest may be bought and sold just like any other interest, and one does not need the permission of any other owners to do so.  Thus the brother can sell his interest to another brother without the permission of the excluded brother.  In fact, these interests may be sold to anyone – and that is one reason why there is a cottage industry in fractional share TIC’s (i.e. Tenancies In Common) for 1031 exchange purposes.

Rescue Scams

The economic climate has given rise to a cottage industry known as “loan auditors” or “foreclosure rescue firms.”  All essentially promise to stop a foreclosure.  I want you to be aware of new Virginia law regulating these practices.

 Typically, the foreclosure scammer will tell the homeowner that he can negotiate a deal with the lender to save the house, or evaluate the situation to look for loopholes, but the scam artist requires an upfront fee, and then often requires a more substantial fee when things “look promising.”

Another variation of the scam involves “loan rescue money.”  In exchange for short-term money ostensibly for the purpose of bringing the mortgage current and avoiding foreclosure, the scammers will have the homeowner sign documents transferring title, legal or beneficial, and if legal title transfers then they promise the homeowner a right to buy the house back while they ‘rent” it.  But whether the scammer is trying to flip the house or just “renting” it, the scammer rarely makes the house payment (simply pocketing the money) and so the house is lost to foreclosure anyway.

Under the new Virginia legislation, it is now unlawful to charge a fee to someone to avoid or prevent foreclosure prior to closing on a sale of the house (i.e. no upfront fees). Now, there is an affirmative obligation on the person providing the “rescue” money to make the underlying house payments and to apply any rents received to the house payments.  In addition, if the rescue provider makes a representation that the homeowner has an option to repurchase the property then that option must be in writing.

Please be aware of these scams, not only to protect your clients, friends and family, but also not to inadvertently get drawn into assisting someone who engages in any unlawful practices (there are legal ways to do this though).

Brian, I’ve got a closing where we can’t get the repairs done in time. What do I do?

Hmmm.  I suppose it is too late to fuss about repair timing. Perhaps that wasn’t the agent’s fault  anyway (didn’t ask).

The first thing you do not do, and I get asked this quite often, is blithely have the seller write a personal check to the buyer at closing for the cost of the repairs.  And the reason is not because it is inherently illegal to do so – rather it is illegal only if it is not disclosed to, and approved by, the lender.  So, here are your options (assuming an agreement):

· Amend the contract to extend the date for closing and get the repairs done before closing.  This is really the best option, but I understand that it is not always practical

· Check with the lender to see whether the loan type and underwriting guidelines will permit a repair credit (or escrow), and if so amend the contract and show the credit (or escrow) on the HUD-1

· If a credit/escrow is not permissible, amend to remove the repairs and instead pay closing costs, etc.  But you must check with the lender to see whether the loan type and underwriting guidelines will permit this, and as always it too must be transparent and disclosed

Brian, I’ve got a closing with an unreleased deed of trust, but the settlement agent who closed the deal is out of business and gone. What do I do?

Unfortunately we are seeing more and more of this as a result of the economy generally and the real estate market specifically.

If the problem is an unreleased deed of trust then have the sellers search their records carefully to see if they can locate anything from the closing – a payoff statement, HUD-1, etc.  We can usually track down the lender, verify payment, and get the release directly.

If the problem is something else – proof of death in the chain of title, an affidavit, or something to that effect – then we can usually solve those problems as well, it just takes us some time to do so.

But this question really suggests two indirect observations.  First, if the seller had owner’s title insurance then the seller would have a better chance of closing on time and would be protected if not.  Second, this is why that buyer should close with Lytle Title.  I have been doing this work for two decades and I have every file I have ever closed, and I am not going anywhere.

Please feel to contact me if you have questions. 

Brian, can a buyer waive her rights under Virginia Property Owner’s Association Act?

In a word, no. Va. Code § 55-509.4, which sets forth the Act’s contract disclosure requirements and rights of cancellation, says:

F. Except as expressly provided in this chapter, the provisions of this section and § 55-509.5 may not be varied by agreement, and the rights conferred by this section and § 55-509.5 may not be waived.

(emphasis added).  So, that would seem to be a pretty definitive statement.  In fact, I’m pretty sure Lem Marshall takes the position that this provision means the REIN contract requirements obligating a buyer to acknowledge receipt, etc. or waive are not valid and enforceable.  Now, I’m not sure I would go that far but it is certainly possible a court might so rule.  I would point out though that under the Act a buyer does waive the right to cancel if not exercised by settlement.

As a practice pointer I would like to see our agents get an email from buyer clients acknowledging they have read and understand the packet, which might be prompted by a “do you have any questions” sort of email to them (print the reply).

Feel free to contact me if you have questions.

 

Brian, what is the difference between special and general warranty, and should my buyers be worried?

A general warranty seller warrants (promises or guarantees) that he holds clear title to the property and has a right to sell it.  This warranty covers (all) problems created back in the chain of title.  A special warranty seller, however, basically only promises or guarantees that he has not created a title problem.  Obviously then  general warranty is better than special warranty.

If you are a listing agent there is no need to strike the boilerplate REIN language unless you represent a fiduciary (executor, trustee, etc.) or perhaps an institutional seller.

If you are a buyer’s agent protect your buyer by recommending (insisting really) that he purchase an enhanced owner’s title policy.   I would question why a non-institutional seller would want to convey by special warranty and that ought to raise a red flag.

Never accept a deal where the seller strikes the clear, marketable and insurable title language of the contract, and I would prefer that you let me review any contracts where the mechanic’s lien or seller affidavit language is struck.

Feel free to contact me if you have questions or concerns.

Brian, when should my seller's cancel their homeowner’s insurance?

To be safe sellers should not cancel until the deed is recorded, the payoff is received, and they have proceeds in hand.

 Sellers want to cancel as soon as possible because they get the balance of their premium refunded.  But they should make sure they are no longer deemed to be the owners of the property because they run the risk that they will be responsible for a loss without insurance to pay for it (a house fire for example).

So, when are the sellers no longer the owners? Since the contract says the “seller bears the risk of loss until settlement” it might well be that once all the conditions of the contract, the lender, and the Wet Settlement Act are met that “settlement” has occurred, but it makes no sense whatsoever to test that theory in court with one’s fortune at stake.  Rather, prudence would dictate that they wait until the three conditions I noted above are met.  Typically, these are completed within 7 days.

Use that as an opportunity to touch base with your seller.  Remind them not only to cancel insurance, but also to look for an escrow and excess payoff refund from their lender (and perhaps pursue an MIP refund also).

I would think they would feel very well represented if you do.  And so they should.

Brian, I have a listing where the couple is divorcing. They hate each other. I can’t get them to agree on a thing. What are my obligations?

Even though you may feel sympathetic to one party, and believe the other party is simply being an obstructionist, please be reminded that both of them are clients to whom you owe a duty.  Read on.

 

I am frequently asked, and was last week, what a listing agent should do when she finds herself representing an estranged husband and wife with at least one of whom hating the other so much that all you get is one obstruction and objection after another, making it nearly impossible, if not impossible, to actually get the house sold.  Listing agents want to know their legal obligations and get some practical advice.

 

First, both are your clients.  Neither the law in general nor VREB in particular provide for a different duty of care to nice clients versus mean clients.  You don’t really need me to tell you that.  But you must remember it because it is all too easy to fall into the trap of dealing with the nice person one way and the mean one another way.  You simply cannot start providing different advice to one client for whom you feel some sympathy, or taking sides in a marital dispute.  Do not, I repeat do not, send emails to your nice client saying “I know this isn’t your fault, your ex is such a jerk” or send an email to only one of them providing advice – always send any such advice emails to both.  The important thing to understand, I think, and guide you is that this situation is really no different than if you had a single client who wouldn’t follow your advice, etc. and you should proceed accordingly.

 

But you are not without recourse and leverage.  If one of your sellers is not cooperating and abiding by the terms of the listing agreement (or to the contract if one has been signed) then you can threaten the obnoxious spouse with a suit for commission.  As a reminder, you must get Donna, Elaine, and/or Liz involved before doing so, and they will involve me if they think it necessary.  Also, depending on the posture f the case, you can get the divorce attorneys involved and they might bring a contempt action if necessary.   After all, unlike your duty as an agent you do get to choose which party you sue in that lawsuit.  So, in summary, simply work with both of them the best you can, being mindful of that fact that both are clients, and then use the leverage you have to force the crazy spouse to cooperate.  

 

But this is way too far down the road to start trying to solve the problem, and threatening lawsuits (and filing them) isn’t the most productive use of your time.  There are proactive steps you can take at the outset of any such listing to avoid such problems, which I will discuss and provide some forms at my next Lytle Law Lunch and Learn on Divorce (general information for my staff and consumers, with an emphasis on real estate related issues for agents).  Please mark it on your calendar for October 29 at noon in the Newport News training room if you would like to attend, and email Lara at the law office so we have a handout for you.

Brian, the seller wants to change or strike the general warranty, state of title, and/or mechanic’s lien clauses from the contract, is this ok?

No, it is not ok.  Explanation below (and come to the October 13 Roundtable for an even better explanation from First American regarding title insurance!).

The current market has generated more than the usual normal number of institutional sellers such as REOs, institutional investors, relocation companies, foreclosed property re-sales, and simply investor-buyers-turned-sellers. And these companies seem loathe to take any risk, real or imagined, and since many are out-of-state they are not familiar with Virginia law, custom, or practice.  As a result I am being asked quite frequently whether it is ok, from a buyer’s standpoint, to permit such a seller to strike or change the paragraph or paragraphs that address title warranty, state of title, and mechanic’s liens.  These sellers want to strike that language on the theory that they were not owner occupants and do not want to make any warranties or promises regarding the property; rather, they want to minimize or eliminate any potential liability whatsoever (at least what they perceive as liability).  

 

The REIN contract, at paragraph 8, provides (in part) that:

 

Seller shall convey marketable and insurable title to the property by general warranty deed, unless otherwise specified below, subject to any easements covenants and restrictions of record, which do not adversely affect the use of the property for residential purposes.

 

The REIN contract also provides, in paragraph 7, again in relevant part, that:

 

At settlement, seller shall execute and deliver (i) the deed, (ii) a mechanic’s lien affidavit acceptable to buyer’s title insurance company, and (iii) such certificates and agreements as may be required by state and federal authorities for tax and residency purposes.

First, as a buyer’s agent you simply cannot permit a seller to strike the clear, marketable and insurable provisions of the contract.  If you do then your buyer client has no remedy if the seller cannot deliver clear title – the buyer has to close  with bad title – and a title insurance company will not insure against known defects so that does not help.  Since clear title cannot be delivered and title insurance cannot obtained the lender will not make the loan, thus the buyer can argue that the financing contingency is not satisfied and the buyer need not close, but I worry that in response the seller could point to the language in the contract that says handwritten or notated provisions control boilerplate printed ones.  I think the buyer wins, but having to go to court to find out isn’t exactly what Bobby had in mind. 

 

I am not so much concerned about such a seller striking the general warranty deed clause, or more likely, changing it to special warranty (even to quitclaim).  While it is certainly better to have a seller convey by general warranty, that disadvantage can be mitigated by having the buyer purchase an enhanced owner’s title insurance policy.  However, you must retain the language regarding clear, marketable and insurable title otherwise your buyer may be forced to accept an owner’s title insurance policy with exceptions, that is, the title insurance company disavows any responsibility for insuring against a particular, known, problem.  In the trade we say that they “take exception” to the problem (read: buyer you are out of luck).

 

Lastly, the provision regarding mechanic’s liens is extremely important. Lenders require affirmative coverage against mechanic’s liens.  Since they are at risk for a problem they cannot discover or eliminate, title insurance companies, including First American (the company we use), insist upon receiving an affidavit from the seller regarding the absence of work by a contractor or supplier for which a mechanic’s lien could be filed or claimed.  Title insurance companies will not issue a policy without it, and since the lender requires it, the net effect is that you simply cannot close the transaction.  This problem was/is acute enough that REIN included the requirement for it in the contract, and the Virginia General Assembly made it Virginia law.  I just concluded a recent transaction where the seller struck this language (and the buyer agreed) and the title insurance company would not insure without the affidavit.  Despite me pointing out the Virginia law that obligated the seller to provide the affidavit, they would not.  After fighting the battle for a couple of weeks we finally reached a reasonable compromise and the deal closed, but it was not a situation that lent itself to agent/broker/lawyer sanity or client satisfaction.  So please do not allow a seller to strike that requirement, and if you are trying to write a deal and the seller wants to strike it, please contact me and I will help you (and the seller) get past that dispute.  

 

Note that the VAR contract has the same language in paragraph 19 regarding the mechanic’s lien affidavit, and similar obligations with respect to title at paragraph 13.  So there is no practical difference between those of you writing on the REIN contract and those of you writing on the WAAR VAR contract.

Brian, the seller’s spouse won’t sign the contract (or listing agreement). Do I have a deal?

No, as long as both were named as parties.  But read on.

This frequently asked question arises when someone refuses at the last minute to sign the contract or a listing agreement.  The answer turns on how the contract or listing agreement was written and who is refusing to sign (but not why they are refusing).  There are two basic facts patterns:

 

First Fact Pattern: Only One Party Named, Someone Not Named But Necessary Refuses to Sign:

In this typical fact pattern the agent (and usually the client) writes and signs a contract with just one name as a party (the apparent client) only to later learn that another necessary party, and that party’s signature, is missing and needed.  As we have often noted, this can arise when a spouse thinks he or she got the house in a divorce only to find out the property was never actually deeded to them, but it can also arise with unknown heirs, someone claiming to “represent the estate, business partners you didn’t think needed to sign, etc.  Wright v. Bryan, 226 Va. 557 (1984) involved such a situation.  In Wright only the husband, who in fact held title as tenants by the entireties with his wife, had accepted the buyer’s offer and he was the only party listed in the contract.  The wife was neither named in the contract nor did she sign. When the buyer refused to close for reasons unrelated to the state of title the seller husband sued the buyer for breach, and the Virginia Supreme Court ruled in favor of the seller.  In doing so the court discussed the rule that despite the wife’s omission on the contract, which meant that wife was not contractually bound to sign a thing, there was in fact a valid contract between the husband and the buyer (but the buyer breached it).  Had the buyer waited until closing and the seller’s wife then refused to sign then the seller would have been in breach.  This rule is why a builder can agree to sell a lot they do not yet own – on the basis that all they do is promise to acquire title by the time they are obligated to sell to the buyer (but this might be a misrepresentation under the REIN contract re joinder or approval of third parties).  And had the buyer waited and then the seller’s wife refused to sign I think the agent could have sued her client for breaching the listing agreement (unless of course the listing knew the wife was necessary and chose not to get her permission — which would be a VREB violation among others). 

Second Fact Pattern: All Parties Named, But One Refuses to Sign:

This fact pattern usually involves a situation where you know about both (or all) parties, and so both (or all) names appear on the contract (or listing agreement), but then one of the named parties refuses to sign at the last minute. This, too, often arises with a separating or divorcing couple when one of the spouses just changes his or her mind whether out of spite or just because they change their mind.  The distinction from the first fact pattern is that it is understood from the beginning that you need all parties to sign and all are listed as parties to the contract/offer. G & M Homes II, Inc. v. Pearson, 263 Va. 107 (2002) involved this fact pattern:  mom owned one-half of the property and her daughter owned the other half and both were listed as parties.  Mom accepted the buyer’s offer, but daughter refused.  The buyer sued claiming that mom was obligated to sell her half (they tried to get the daughter also, but that failed).  The Virginia Supreme Court said mom was not obligated to sell her one-half on the ground that since both sellers were listed in the contract in was clear both had to accept the offer before there was a valid contract – there was no evidence whatsoever mom was agreeing to sell her one-half when she signed.  The same principle would hold on a listing agreement (any contract really).

 

So, in summary, make sure you always find out who owns an interest in the property.  List them as parties.  And then get everyone to sign.

Brian, the seller died before we could close, can the buyer make the seller’s heirs honor the contract?

Yes.

The Virginia Supreme Court answered this question in the affirmative in the case of Moore's Adm'rs v. Fitz Randolph, 33 Va. 175 (1835).  This result is true not only in Virginia, but to my knowledge in all fifty states.  In many jurisdictions the answer will turn on whether the contract contains language stating that it is “binding on the heirs” of the parties.  Curiously, The REIN Standard Purchase Agreement no longer contains that language (the VAR contract still does), but the law (at least it seems in Virginia) presumes that it is meant to be binding on the seller’s estate anyway.

 

Sometimes the seller dies before the deed is executed and so the question becomes: who will sign the deed?  Again, Virginia law provides a pretty clear answer.  Va. Code § 64.1-148 provides that “When any deceased person shall have executed and delivered a bona fide written contract of sale, purchase option, or other agreement binding such deceased person, his heirs, personal representatives, or assigns, to convey any real property or interest therein, his personal representatives may, upon full compliance by the purchaser with the terms and conditions of such contract, option or agreement execute a deed and do all things necessary to effect the transfer of title to such real property or interest therein to the purchaser and such transfer shall be as effective as if it had been made by the deceased obligor.”

 

It may well be that closing will be delayed somewhat when a seller dies (for example, if the seller had not signed the deed you might need someone to qualify on the estate in order to sign the deed), but as you can see it is clear that the buyer can insist and require the estate to conclude the transaction.

Is the reverse true?  Can a seller require a deceased buyer’s estate to perform the contract?  While in theory it is true (the case above refused to answer that converse question), bear in mind the practical nature of our modern contracts – financing based on the buyer’s income not to mention actually being alive, owner occupancy, etc. would almost certainly dictate a different result.  Perhaps if the contract were a straightforward, non-personalized, cash deal one could bind a buyer’s estate.  Otherwise I would say no.

 

Brian “Sixth Sense” Lytle

Brian, when should my sellers cancel their homeowner’s insurance?

I would not want sellers cancelling their homeowner’s insurance until the deed is recorded, the payoff is received, and the sellers have their money in hand.

Obviously, sellers want to cancel their insurance as soon as possible because they will receive a refund of any unearned premium and the sooner the cancellation the more they get back.  Equally as obvious, they want to make sure that the transaction is concluded and they are no longer deemed to be the owners of the property because they run the risk that they will be responsible for a claim – the house burns down for example – without insurance to pay for it.

 So, when are the sellers no longer deemed to be the owners?  There is a long-standing debate concerning the precise moment of “closing” for many purposes.  It might well be that once all the conditions of the contract, the lender, the title insurance company, and the Wet Settlement Act are met that one could legally say closing has occurred for the purposes of a claim against the house.  However, it makes no sense whatsoever to recommend that your clients test that analysis in court with their personal fortune at stake.  Rather, prudence would dictate that they wait until the three conditions I noted above are met.  Typically, these are completed within a week to 10 days. 

I know agents are always looking for good reasons to touch base with clients, so I would suggest that you remind your sellers to cancel 10 days after closing as long as the deed is recorded and they have their money.  You might also take that opportunity to remind them to look for an escrow refund from their mortgage company, an excess payoff refund from their mortgage company, and to expect an unearned premium refund from their homeowner’s (and flood if applicable) insurance company.  Likewise, there may be some opportunity to receive an MIP/PMI refund and you might help them look into that.