REAL ESTATE TRANSACTIONS BROKERS A. What duties are owed? 1. Seller’s Broker i. To the Seller – Fiduciary Duty. More than just a duty of good faith, must do something for the seller even if it is against their best interest. ii. To the Buyer a. With no agreement – Duty to be trustworthy, honest, and disclose known defects that are visible. b. With dual agency agreement – Some duty more than good faith and less than fiduciary (unclear) 2. Buyer’s Broker i. To the Seller – Duty to be trustworthy, honest and competent. ii. To the Buyer – In majority of states there is only a duty from the Buyer’s broker to the Seller’s broker. In CA there is a fiduciary Duty to the buyer. More than just a duty of good faith, must do something for the buyer even if it is against their best interest B. Types of agreements (listing agreements b/w seller and broker) 1. Exclusive right to sell --The tightest agreement, no matter who ends up finding a buyer for the property the seller’s broker gets the commission i. Must have a termination date ii. How the broker gets paid a. The property is sold b. After the agreement expires, if the property sells to a person that the broker has put on a list c. If the seller withdraws the property d. If there is an offer to purchase at the listing price, or any price acceptable to the seller and the buyer is ready, willing and able to close the deal. 2. Exclusive agency --Anyone who buys the property the listing broker gets the commission, unless the seller finds the buyer themselves i. Must have a termination date ii. How the broker gets paid a. The property is sold b. After the agreement expires, if the property sells to a person that the broker has put on a list c. If the seller withdraws the property d. If there is an offer to purchase at the listing price, or any price acceptable to the seller and the buyer is ready, willing and able to close the deal. 3. Open listing --Anyone who procures the buyer gets the commission. Can list the property with 100 different brokers i. Seller can terminate at any time In standard listing agreement, paragraph 7 allows the broker to become dual agent and represent a buyer. PURCHASE AND SALE Offer Counter-offer Agreement Deposit Due Diligence (time period during which the real property is inspected) • Financing • Title • Physical • Leases • Environmental • Governmentl Approvals • Soil • Survey • Mandatory Disclosure Schedule The Agreement A. The buyer generally can assign the right to purchase to someone else. If you don’t want this, put in the contract that the buyer has no right to assign his rights under the contract. B. How to identify the property? 1. Commonly known street address (not a good way) 2. Tax assessors parcel number (apa) 3. Parcel or subdivision map 4. Metes and bounds The Deposit is given to escrow and then the due diligence process starts. A. Deposit is usually refundable until the end of the due diligence period. B. Additional deposits can be given to extend the due diligence period per the agreement. This additional deposit can go towards the purchase price or go beyond it. C. Deposit usually forms part of liquidated damages. 1. Buyer and seller can agree that if one party seeks damages it will be limited to an amount called liquidated damages. This does not waive your right to seek specific performance, just limits your money damages. This figure must be reasonable. In CA residential liquidated damages are limited to 3%. For commercial there is no limitation but it must be close to 3%, maybe up to 5%. Due Diligence A. What kind of look does the buyer have? 1. Free look – The buyer has x number of days to decide if he wants to buy the property. This does not obligate the buyer to anything. 2. Standard look – The buyer can only reject purchase at the end of the due diligence period for a reasonable reason. B. Does the seller have a right to cure? 1. Standard AIR form gives seller right to cure. Purchase Price A. This is composed of the initial deposit + any additional deposits (maybe to extend the due diligence period) + Loan (new loan, assumption of existing loan, seller carryback) + rest Closing A. The closing date can be listed as a specific date, or a number of days after the deposit. B. Seller wants to have a time is of the essence clause, this way after the closing date the seller can kill the deal and keep the deposit. C. Contingencies to closing 1. Disclosures: this must be done by the seller. In CA, the seller must give notice to the buyer of any known defect on the property (mandatory disclosure report). Rule of thumb is that if you think there is a doubt, just disclose it. 2. Physical inspection (can be small or huge, depending on what you are buying). Make sure that you are using licensed people, make sure they are insured, make sure you have a binding contract with them. If there is a problem, get an estimate 3. Environmental inspection – this is very important because CERCLA aka Superfund makes an owner/operator of a contaminated facility strictly liable for cleanup costs. The only defense is that if a buyer does reasonable investigation and finds no sign of contamination then they are not considered an owner/operator. What is reasonable investigation? i. First must do a phase I – This is a non intrusive inspection. If no problem then you are ok. If there may be a problem then go to a phase II. ii. Phase II – Targeted review of the problem iii. Remediation – This should be supervised by a proper agency iv. NFA – Get a no further action necessary letter from the proper agency Environmental – Phase I • Site Location • Site Operations • Adjacent Locations o Important to know what the adjacent and surrounding uses are because your property can be contaminated through the groundwater • History o Find it through title, interviewing people, looking at the structure, also look at the state’s archive of photographs (fire insurance), construction permits at the building department. • On Site Observation • Physio/Hydrogeology o Depth o Gradient o Soil • Above Ground Storage Tanks/Under Ground Storage Tanks • Hazardous Material • Solid Waste • Waste Water – Where is the facility dumping their waste. • Databases – Where are hazardous places in relation to your property • Wetlands • Specific Chemicals: Lead based paint, PCB, Pesticides, Methane, Radon, Asbestos (friable asbestos is dangerous, this means that it will crush with one hand) • Mold – you need a cellulose based substance and water. There is almost always mold, the question is how much and how concentrated is it. If there is heavy evidence of mold that means that there is water that is not evaporating. • Conclusion o 1) No evidence of any trouble o 2) Huge contamination problem and here is where it is o 3) We don’t know for sure, but there might be, here the next step is more review Phase II A. This is more intrusive testing B. Problem: You do not own property so you must ask permission to do testing and ask permission to disclose to govt. anything found. C. Engineer wants more testing to limit his liability and make more money, seller wants less testing because he has to disclose known defects. Soil A. More of an issue on vacant land. B. Can the soil support the building? LAND USE (government approvals) A. Issues: 1. What can you use the property for? 2. What physical improvements can be built on the property (measurements, height, etc.) 3. Entitlements (subdividing land) i. Under the subdivision map act, you can not transfer property unless the boundary has been approved by the city. To subdivide a large plot, the city will take a cut and force you to build streets and stoplights. B. Types of uses: 1. Permissive – automatically allowed 2. Conditional – need to ask permission from city C. Changing zoning (uses) 1. Apply for conditional use permit 2. Variance 3. Re-zoning – First you apply with the city, then you give notice to surrounding landowners. There is a public hearing and the city issues a ruling. TITLE INSURANCE (Seller picks escrow company, buyer picks title company) A. Two issues: 1. Interest in real property that is being purchased i. Fee simple, life estate, easement, lien 2. Condition of that interest i. Marketable, Insurable, etc. What rights to 3rd parties have? B. Title company prepares 1. Preliminary Title Report --tells you who the owner is, what the legal description is, if there are any encumbrances. This is just a report, it is not insurance 2. Commitment --Looks just like a PTR, if you give the insurance company the premium at closing, it becomes insurance. 3. Binder --Closer to insurance but it is limited. It may give you insurance of a limited period of time. Less expensive, less broad in scope than the other two. C. What are you covered for – Section A • Others owning your property • Documents are improperly signed or forged • You are covered if your property has no legal access to a public road • No restrictive covenants • Liens • Other parties who have right to property, easements • Unmarketable title • Use of the property is not prohibited by the zoning commission D. Exceptions to coverage General and Specific – Section B General • Govt Police Power and Laws • Condemnation (If govt. comes in and takes your property, then you are not covered) • Title risks created by insured (bought property with drug money) • Defects revealed by inspection • Failure to pay consideration for property • Covers only your interest in this particular property Specific • Specifically listed exclusions E. Types of encumbrances found in Title Reports 1. Monetary --Deeds of trust for whatever amounts, judgment liens, back taxes, etc. 2. Non-monetary --Easements, CC&R, Leases, Encroachments (may not show up in PTR), etc. i. If there is an easement the questions are: Where is the easement? And what rights does the easement holder have? (Can they remove improvements on the easement?) F. Endorsement – can get added insurance, called an endorsement, for a particular issue SURVEYS Matters disclosed by a survey • Survey is a visual representation of the boundaries of the property, improvements on the property and where the rights of other parties are on the property. They are licensed by the State. • Types of Surveys o Boundary o Construction: What space is available for construction o As built survey: After construction, what has been built in relation to boundaries o MATTERS DISCLOSED BY A SURVEY relates to the ALTA/ACSM survey. This is the most important. Boundary of the property Improvements and where they are located Map of all of the easements Parking lot Landscaping Encroachments Existing Leases and Tenancy Statements Usually review the leases and determine if you are willing to purchase the property. But how do you know that there are no modifications to the lease that you are reading? There is an estoppel certificate that given to the tenant, he signs it and it sets forth all the material terms of the lease, and the buyer can rely on it. • There is a copy of the lease attached • Who are the lease parties? • What is the leased space? • What is the lease term? • What is the rent? • What is the security deposit? • What are the landlord’s duties? • Are there any modifications to the lease attached? • Are there any uncured defaults? (Does the tenant owe any rent) • Are there any other disputes existing? • Have there been any non-permitted alterations? • There is no assignment or subletting allowed. • Guarantees – 3rd party basically on the hook for rent or costs. • Make sure the tenant is not in bankruptcy • Buyer can rely on these and they are true What if the tenant doesn’t want to give an estoppel certificate? Section 9.1 H says if a tenant refuses to provide an estoppel certificate then the seller should complete and execute an estoppel certificate for that tenant. The problem is that it does not mean anything down the road other than that you can sue the seller. Other Agreements Affecting Property • Agreements with maintenance man, gardener etc. Buyer usually wants right to terminate agreements. • During executory period, AIR form says that Seller can not enter into leases without Buyer’s permission. Buyer can not withhold permission unreasonably. Financing Financing contingency – Buyer has a certain amount of time to find a loan to fund the purchase price. Important for the buyer to put in the agreement that finding financing is a contingency to close. Buyer has obligation to apply for a loan in good faith. SNDA --If there is an encumbrance on the property (like a lien or lease) the lender will want a SNDA (subordination and non-disturbance agreement), get the lienholder or leasee to subordinate their interest. The first part of the agreement is the subordination, the nondistuurbanc part is a way to get the tenant to subordinate. It says if you are not in default then I will not disturb you, if you are in default then you are gone. The reason the tenant does this is that it is often required in the lease. For the lender, it makes it easier to get rid of a defaulting tenant. Open and shut case LOAN DOCS • Promissory note/Loan Agreement (not recorded) – This creates the debt, it says you will pay this amount of dollars in this many increments. Parties are the maker (borrower) and payee (lender) • Deed of trust (recorded in the county records) or Mortgage – The mortgage is a 2 party agreement (mortgageor and mortgagee). Deed of trust has 3 parties (trustor is the borrower, trustee is a 3rd party, and beneficiary is the lender). The deed of trust includes: o Assignment of leases and rents o UCC-1 Fixture filing o Financing statement (filed at the secretary of state office): secures the debt with respect to any fixtures and personal property on the property Damage During The Executory Period A. If not discussed in the contract – CA has adopted the UVPRA that says that if the contract does not state who bears the risk of loss, the law implies that if title or possession has not passed and there is damage to the property, then the seller can not enforce the contract. If the buyer has taken possession or title, then they take the hit (cannot rescind the contract). B. AIR Form --If the damage or destruction is $10,000 or less, the seller has to repair the damage before closing. If the damage is more than $10,000, then the buyer has to be notified by the seller of the damage or destruction, and within 10 days can decide whether or not they want to remain in the agreement. If they want, they can cancel the contract and get all of their deposit back, or they can stay in the agreement without a reduction in purchase price and then they get any insurance proceeds if there are any. MATERIAL CHANGE Material change: definition in section 9(n): Change in the status of the use, occupancy, etc. The seller must give notice, and the buyer has a choice whether or not to continue with the deal (AIR form allows buyer 10 days to terminate). The definition is vague. Only talks about the change that occurs to the property. If a liquor store is built next door, that does not change the property itself. REPRESENTATIONS and WARRANTIES • Just because you have an “as is” clause does not exempt you from having to disclose known material defects • As a buyer, you are really looking for the seller to make representations and warranties about things that are very difficult for you to find out. What are some of these things? Noise or crime in the area, notices of violation, pending litigation, unrecorded covenants (expand this and ask that all the agreements with respect to the property have been delivered), is the seller facing bankruptcy, has there been any construction done on the property (there may be a lien placed on the property after you buy it if the seller did not pay the constructors). CLOSING New York closing – all the parties come into a room and swap papers and do the closing. West Coast closing – Everyone stays in their own offices or homes and send in the documents to the one escrow company. When the escrow has all the documents and all the instructions, they execute and close. What are the necessary documents: Seller: • The Deed o General Warranty Deed: provides all 6 warranties of title o Special Warranty Deed (aka: Grant Deed): This is what is used in CA, it only says that the grantor has not transferred any interest in the property to another person. This is why title insurance is so important, the insurance company covers the 6 warranties. o Quit Claim Deed: This does not have any warranty at all in it. It basically says that I transfer to you any ownership interest I have (does not guarantee that the person even owns it). • Bill of sale – Transfers any personal property involved in the deal • Assignment and assumption of contracts – Seller assigns all contracts that have to do with the property • Assignment and assumption of leases • Estoppel Certificate • Fees and Prorations – Seller pays for the owner’s title insurance policy, splits the escrow fees, pays the transfer taxes, and the brokers commission. Buyer: • Money (also comes from the lenders) • Assumption of contracts • Assumption of leases • PCOR – Preliminary change of ownership report: This document is sent to the tax assessor’s office describing the property and purchase price and used to determine the value for tax purposes. • Fees and pro-rations – If there are rents paid on the first, but the buyer closes on the 15th, he is entitled to half those months rent. Aside from rents there are taxes. Property taxes are done in a weird way, the first bill is for the “first half” (July 1 to Dec 31). The second bill is for the “second half” (Jan1 to June 30). In CA property value for tax purposes can only change if there is a transfer or construction. On march 1st the assessor will look at your value and give that info to the auditor/controller, the auditor sends a bill to you which the first installment is due on Nov 1st (delinquent after Dec 10th). The second half is due Feb 1 (delinquent after April 10th). As far as fees, typically the buyer and seller split the escrow fees. The buyer pays for the lenders title insurance. If the seller is a foreign entity, then escrow will be instructed to with-hold some money of the buyer’s to pay for taxes. This is avoided by getting affidavits from the seller that they are not a foreign person (FIRPTA). The Closing Date • AIR 8.8 – Closing occurs on specified date or as soon thereafter as parties are ready for closing. If goes beyond specified closing date, then a party not in default can give written notice to the other party that contract shall be terminated unless closing occurs within 5 business days. The best idea is to have a time is of the essence clause.