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.