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This article will provide a brief “tip of the iceberg” overview of who the typical “players” are in the course of a residential purchase and sale and the legal obligations and liabilities that each may bear. Whole articles can, and have been written about the law relating to each one of these persons, and in the future, we will concentrate on each, but for now, this will provide some orientation if you are involved in buying or selling a home. Before we discuss the “players” it is worthwhile discussing some basic real estate terminology.
Basic Concepts, “In Escrow,” “Closing” etc.
In real estate speak, transactions are regarded as “in escrow” when the parties have agreed upon the basic terms of the contract and are waiting for the parties to exercise their rights (like conducting inspections) and options (such as voiding the contract if they don’t like the inspection results). When/if the parties actually get to the point of paying money in exchange for passing the title, the transaction is said to have “closed.” Thus, a transaction can be “in escrow” for a while, and then have “closed,” However if one of the parties pulls out of the contract, in accordance with the contract terms or even in breach of the terms, the transaction is said to have “fallen out of escrow.”
When the transaction is “in escrow” a “title insurance company” will issue a “preliminary title report” to the Buyer. The PTR basically lists all of the circumstances appearing on the record that prevent the Seller from conveying an absolutely clean title. For instance, it may note the gas company has an easement to maintain its pipes, or the neighbor has an easement to use the driveway. The PTR is a statement that the title insurance company might use to ensure that the Seller can convey a clean title, except for the items it has noted on the list (exceptions), and anything the Seller knows about already, or anything that a survey might have revealed is a problem. In this respect, a title insurance policy has been noted to be unique, in that it ensures circumstances that have already occurred (the status of the title), not circumstances that are yet to happen (like a fire). It is obviously very important for the Buyer and the Buyer’s agent to read the title report and if they don’t understand it seek clarification from the title company or an attorney.
Transactions are “closed“ by an escrow company, which is often owned by a title insurance company. They act as the middleman between the parties. They keep the deposit and purchase money while the transaction is “in escrow.” When it comes time to “close” the escrow agent has the Buyer and Seller’s each sign the necessary documents. They make sure the Buyers have deposited the funds necessary to make the purchase and cover any applicable fees. They make sure the Sellers have signed the documents necessary to convey ownership. They make sure other monies will be distributed to make sure other encumbrances are paid off (like the Seller’s mortgage), and fees are paid (like judgment liens or the agents’ real estate commissions). The escrow agency is bound to follow the “Joint Escrow Instructions” of the parties.
OK, with this said who are the main players in the typical residential real estate transaction and what are their duties?
Obviously, the Seller is the person who owns the property and wishes to convey the property. The Seller of course is obligated to abide by the conditions of the typical purchase and sale agreement, which in most cases a form prepared by the California Association of Realtor (CAR) The CAR form provides that the Seller will convey good title to the Buyer upon the completion of the terms and conditions of the contract. That means that by the date the transaction closes he will be the owner and will convey it without any encumbrances affecting the title.
Unless they do so by express representations, Seller’s do not warrant that the property they are selling is any particular condition. In other words, there is no Seller’s implied warranty of quality or physical condition.
However, precisely because the Seller makes no implied warranty as to the condition of the property they have an important obligation to disclose to the Buyer any fact of which they are aware, and which they know the Buyer is not aware, that might affect the desirability or value of the property.
So, a Seller is not protected by the simple statement that the property is being sold “As Is.” That only advises that the Seller is not intending on making any changes or improvements to the satisfy the Buyer in order to make the sale. Indeed, when property is being sold “as is” it is all the more important that the Seller disclose known material conditions of which the Buyer is unaware so that the Buyer can make an intelligent decision what the “is” in “as is,” actually “is.” As President Clinton infamously testified, it comes down to what the meaning of “is” is. In a following article we will discuss traps for the Seller in fulfilling their obligation of disclosure. Absent some reason to suspect the Seller has made a misrepresentation, the Buyer is under no obligation to confirm the Seller’s representations.
In addition to their obligation to disclose conditions about the home of which they are aware, the Seller is also obligated to complete various disclosure forms that are provided for by state statutes.
The Seller’s or “Listing” Agent/Broker
The Seller’s or “Listing” Agent and Broker is the agent and Broker the Seller has chosen to represent them in the sale of the property. The Agent is usually an independent contractor or employee working for the Broker. As a practical matter, the Broker is going to be found liable for the errors and omissions of the Agent.
By statute, the Seller’s agent owes a fiduciary duty of utmost care, integrity, honesty and loyalty to the Seller. Fiduciary duty is the highest level of duty owed under the law, such as a trustee might owe to the beneficiary of a trust. So, for instance, a Seller’s agent has to disclose relationships they might have with the Buyers. He also owes the Seller the diligent exercise of reasonable skill and care in the performance of the agent’s duties, as well as the duty of honesty and fair dealing.
That duty of professionalism means the Seller’s agent is the consultant to the Seller, for instance in investigating the creditworthiness of a Buyer to whom the Seller is going to extend financing.
Another area the agent may be assisting the Seller in is in complying with the Seller’s obligation of disclosure. We have had many cases in which a Seller has advised their agent of various circumstances affecting the property, which the agent has told the Seller they need not disclose. If those undisclosed circumstances turn out to be important, both the agent and the Seller can be held liable for non-disclosure, even if the Seller was advised by the agent it need not be disclosed.
At the same time, the Seller’s agent is not obliged to investigate the ramifications of facts they are told about by the Seller or determine if what the Seller tells them is true or not. They must merely make sure they are disclosed if they are material. And they must make sure they do not make misrepresentations concerning the condition of the property in the course of marketing it, such as misrepresenting that the property has a certain number of bedrooms, or misstating the acreage etc.
The Seller’s agent is obligated to do their own a visual inspection of accessible areas of the property and to make their own disclosure of anything of note that they observe.
The Seller’s agent not only is obliged to the Seller, they have a duty to the Buyer of reasonable skill and care, honesty, and fair dealing. This means the Seller’s agent owes a duty to the Buyer to disclose material circumstance affecting the property of which the agent is aware, even if the Seller is not aware of them, or does not want to disclose them. That can occur when the agent has been involved in the purchase of the property when the Seller, or a previous owner, bought it or sold it. It happens. If the agent fails to disclose material circumstance of which they are aware, both the agent and the Seller may be liable, even if the Seller himself was unaware of the material circumstances.
The Seller’s agent is paid by a commission they receive from the Seller upon the sale of the property, typically 6%. They will generally split that commission with an agent that brings them a Buyer.
The Buyer is obviously the party seeking to purchase the property. They are obligated to abide by their promises made in the purchase and sale agreement, the most important of which is to pay the purchase price by the date designated in the contract in which the transaction is scheduled to “close.” They also owe to the Seller an obligation of good faith and honesty. So, they cannot lie to the Seller about their creditworthiness in trying to persuade the Seller to extend them Seller financing.
More broadly, however, the Buyer is obligated to take those steps necessary to protect their own interests.
As stated, the Seller has a duty to disclose material conditions unknown to the Buyer and that are not within the Buyer’s “diligent attention and observation.” So, if the Buyer fails to exercise “diligent attention and observation” such as making a diligent visual inspection of the property, or calling for professional inspections where appropriate, they risk excusing misrepresentations by the Seller.
The Buyer cannot simply accept statements of the Seller without investigation when the circumstances would not lead a reasonable person with their knowledge and experience to do so without further inquiry or investigation. A Buyer of real property may well be charged with knowledge of the facts a reasonable inspection would disclose.
The Buyer’s Agent
While the Seller’s agent has no duty to discover the condition of the premises beyond their visual inspection, or to investigate the ramifications or truth of the Seller’s representations, the Buyer’s agent’s obligations are far different.
The Buyer’s agent owes the Buyer a fiduciary duty which encompasses the “utmost” care, and “diligent” exercise of skill and care. While the Seller’s agent must disclose facts, the Buyer’s agent must learn the facts. The Buyer’s agent must read everything and alert the Buyer if there is anything of particular importance contained in documents, such as unknown liens or easements encumbering the property disclosed on the preliminary title report.
The Buyer’s agent is the Buyer’s’ real estate advisor, who must investigate the representations made by the Seller, determine their possible ramifications, and advise concerning the need for further investigations and inspections, and the advisability of the transaction itself. The Buyer’s agent is not expected to render advise beyond his or her training, such as engineering or legal advice, but is obligated to advise the Buyer to seek that type of advise when it appears necessary to do so.
Importantly, the Buyer’s agent may not take at face value the representations of the Seller/Seller’s agent, he must either verify them or warn the Buyer that they are unverified. The Buyer’s agent’s obligations in this regard become particularly important when the Buyers have expressed a feature of the real estate with which they are particularly concerned, such as they really, really, want property they can subdivide. In that situation the Agent cannot merely accept the Seller’s representation the property can be sub-divided, unless he warns the Buyer he has done nothing to verify if it is or is not.
The Buyer’s agent is generally paid by receiving half of the commission the Seller owes to the Seller’s agent
The Dual Agent
A dual agent is one that represents both the Seller and the Buyer. The dual agent is the enviable position of being paid the full commission for selling the property without splitting it with another agent that has brought them a Buyer. When one agent lists the property and then also finds a Buyer for it, it is sometimes called “double ending” the transaction.
There is nothing illegal about it, the position has its perils however. As a dual agent, the agent owes fiduciary duties to both the Buyer and the Seller. The same is true of a brokerage company in which both the Seller’s agent and Buyer’s agent are employed.
The dual agent must, on behalf of the Seller, make sure the Seller has made all necessary disclosures, and then must, on behalf of the Buyer, must assist the Buyer to investigate all the ramifications of those disclosed facts and advise what further investigations should be undertaken.
The dual agent has the obligation to communicate all offers or counter offers of either party to the other but is prevented from communicating confidential information such as what a party would “take” or “settle for.”
As this overview indicates, the sale of residential real estate employs a disclosure/investigation model. The Seller and his or her agent must disclose known material facts. The Buyers must protect themselves by doing any necessary investigation that the disclosure of such information indicates might be prudent. The Buyer’s agent is the Buyers consultant as to what that investigation should entail.
Like any system based on disclosure, the law creates an obligation of honesty and good faith on the part of the parties. Violation of those duties can have severe ramifications which we will discuss in a future article.