1. When an agent recommends an attorney to "handle closing", whom does the attorney represent? If the attorney represents the Buyer, what obligations are owed to the Realtor? to the Lender? to the Seller?
Many times our Realtor. and lender friends recommend a client to us to conduct settlement. We are always appreciative of such recommendations. Sometimes, in such cases the client will ask us "who does the attorney really represent?"
The Client/Purchaser Regardless of who pays for the services, if we are hired to "handle closing" in a Delaware residential real estate transaction we generally represent the purchaser/ mortgagor. Naturally, as the closing lawyer, we are bound by all ethical requirements and considerations applicable to members of the bar.
The Guideline The Supreme Court of Delaware promulgated an interpretive guideline of the Delaware Lawyer's Code of Professional Responsibility and its application to residential real estate transactions to make sure this concept is understood and that any conflicts are disclosed to the purchaser -- whether the conflict is real or potential.
The Guideline is intended to assist the closing lawyer and to protect the public regarding an attorney's representation of purchasers and mortgagors in residential real estate transactions and to make certain that the purchaser or mortgagor selected the attorney freely and voluntarily, with full knowledge as to any possible conflict of interest. The Guideline applies where the closing lawyer has been contacted upon referral by the seller, lender, real estate agent, or other person having an interest in the transaction. The Guideline applies to all residential real estate transactions including refinancing of mortgage loans and investment transactions.
The Guideline requires written notice to the purchaser/mortgagor at the earliest practical time before the attorney accepts the representation, that the client
- a. has the absolute right to designate his or her own lawyer; and
- b. has been advised of all facts concerning any possible conflict; and
- c. wants the particular lawyer to represent him or her regarding the purchase or refinance of the residential real estate.
Resolving Conflicts; Obligations to the Realtor. Naturally, particularly if the purchaser was referred to us by a Realtor., we will have had past experiences with the agent and may have developed a business relationship (which we will disclose to our client). In those rare instances where there is a conflict, we at CONNOLLY BOVE LODGE & HUTZ LLP work with the Realtor. and the client to resolve issues of mutual concern.
Occasionally a purchaser may wish to "cancel" the agreement either because of a "legitimate" reason or because of "cold feet". The closing lawyer must objectively advise his or her client of applicable law and risks. We at CONNOLLY BOVE LODGE & HUTZ LLP try to remember that the client has come to the attorney for professional representation and we therefore try to temper the client's emotional response so that an objective business decision can be made.
If an issue arises which involves the Realtor's. relationship with our client, we apply our experience to the transaction, work through our client's concerns always with an eye to protect his or her rights and remedies. At CONNOLLY BOVE LODGE & HUTZ LLP, we try to obtain the best possible solution for our client while considering the interests of all parties to the transaction. Moreover, as closing attorneys, we make sure that our obligation to the Realtor. is fulfilled, i.e., to be sure he or she is paid under the terms of the sales agreement.
As the closing lawyer we also act as escrow agent for the mortgagee and are held to strict compliance with the terms of the mortgagee's instruction letter. The closing lawyer may not perform any acts not authorized by the mortgagee but is not under any duty to interpret the instruction letter. Just what his or her duties are beyond that is subject to debate. Some courts have said that the closing attorney must notify the lender of a development when such notice is required to prevent a loss to the lender. Others have stated that he or she is under no obligation to go beyond the instructions and, therefore, must only notify the party of a suspicious fact or circumstance.
Similarly, as the closing lawyer, we also act as an escrow agent for the seller. In this capacity, we adhere to the terms of the contract and comply with the seller's instructions, i.e., pay off the seller's mortgage and other obligations and tender the net proceeds to the seller before transferring the property to the purchaser.
As closing lawyers, we wear many hats but endeavor to represent our client's best interests. The key, which we have learned through years of experience, is to recognize the legitimate interests of all parties and to know how and when to take action and thereby avoid unwarranted, costly litigation.
2. Why does CONNOLLY BOVE LODGE & HUTZ LLP recommend that a buyer of real estate have Owner's Title insurance rather than a Certificate or Opinion of Title or a Lender's Title Insurance Policy?
In many states this is not an issue because the same premium paid by the buyer covers both Owner's and Lender's Title Insurance policies. However, Delaware is not a simultaneous issue state. That is, a purchaser has to choose to buy Owner's coverage as well as Lender's coverage Title Insurance. It is therefore helpful to understand what alternatives are available so that an informed decision can be made.
Some attorneys issue a Certificate of Title which states that the closing lawyer guarantees "good record title." Although such a certificate, backed up by assets of the closing lawyer and his or her firm and, hopefully, by his or her errors and omissions insurance coverage, will resolve some of the problems which may arise in the transfer of residential real estate, such a certificate is not the same as title insurance.
Unlike Owner's Title Insurance, the lawyer's Certificate of Title covers only the title of record and does not protect the client from those hidden risks which would not be disclosed by even the most meticulous search of the public records. Defects in title arising from forgery, fraud in connection with the execution of the documents, incorrect representation of marital status of grantors, undisclosed or missing heirs, mental incompetency of grantors, conveyance by a minor, or problems caused by incorrect indexing at the public office will not appear as part of record title, and therefore, are not the responsibility of either the attorney or his or her liability insurance carrier.
A closing lawyer's Opinion of Title is even more limited than the certification of good record title. If the client's purchase is based upon the lawyer's Opinion of Title, there may be matters of record, which could result in a defect in title, but for which the lawyer cannot be responsible. For example, if a closing lawyer bases an opinion upon his or her understanding of the present case law of the state, and if such case law is later overturned by the courts of the state, the purchaser may suffer loss based upon the new interpretation of the law; however, the attorney granting the Opinion of Title based on the law which was existing at the time the opinion was issued, will not be liable to the purchaser for such loss. Fortunately, these perils are covered by an Owner's Title policy.
Some purchasers and some agents only ask for Lender's Title insurance because it is less expensive -- generally, about $1.00 per thousand cheaper (plus the cost of coverage for the purchaser's equity in the property). As the old advertisement says "Pay me now or pay me later!" A small investment today can save hundreds of thousands of dollars in the future.
Lender's Title Insurance only protects the Lender. It will not even indirectly protect the interest of the owner in the event of a loss or even a claim against the title. For example, if there should be a forgery alleged in the chain of title, i.e., an imposter has signed a deed for an estranged spouse, and if the owner does not have Owner's Title Insurance, i.e., only mortgagee coverage is in place, and if a successful claim were to be prosecuted against the owner of title to the property the following catastrophe could occur:
1. The title insurance company (in lieu of paying the claim) could purchase the owner's bond or note from the mortgagee/note holder at its full value, thereby fulfilling its obligation to the mortgagee under the mortgagee title policy;
2. the owner would lose his or her property to the claiming party; and
3. then the insurer (the new holder of the note/bond) could and would proceed against the owner, the signer of the note or bond, for payment of the entire value of the note/bond on its original terms.
In short, under these circumstances, the owner would lose his or her property and still have to pay an amount equal to the balance on the mortgage. Moreover, even if the claim was later proven unfounded, the owner could incur substantial legal fees.
At CONNOLLY BOVE LODGE & HUTZ LLP we recommend Owner's Title Insurance. It avoids the limitations of a Certificate or Opinion of Title. Moreover, should a successful claim be brought, one which is similar to those described above, Owner's Title insurance will not only pay the lender the balance on the mortgage, it will preclude the owner's obligation to the insurer and provide the owner with recovery of his or her equity in the property. Just as important, Owner's Title Insurance will pay attorneys' fees and costs to defend even an unsuccessful allegation of a defect in title -- and we all know how expensive litigation can be.
3. What type of survey, if any, does CONNOLLY BOVE LODGE & HUTZ LLP suggest that a purchaser obtain in a residential closing?
There is no easy answer to this question. It depends upon the client, the intended use of the property and how secure the client wants to be in the knowledge of the extent of his or her property.
The usual "survey", i.e., mortgage inspection plan, will not include corner markers and is being performed as a requirement of the title insurance company and the mortgagee to make certain that the property description, i.e., the metes and bounds of the land, is accurate and that the improvements of the land comply with zoning and set back restriction requirements. Sometimes even though the mortgage commitment does not require a survey, the closing lawyer must order one to eliminate certain exceptions on the commitment for Title Insurance. Because it does not provide corner markers, a survey is not binding to establish property boundaries or building location.
No title insurance company in Delaware will remove the "survey exception" from its coverage without a recent survey and an "Affidavit of No Change." Although such an endorsement is available in many states at an added cost, it is not used in Delaware. Moreover, not having a survey opens the door to potential problems in property description and building or improvement location which could impact upon the owner's ability to convey the property to a subsequent purchaser.
Even if not required, we generally recommend that as part of a purchase, the purchaser obtain at least a mortgagee inspection plan. In an exercise of prudence, where improvements are anticipated such as a new addition to the home or a new swimming pool, or where the client wants to be certain of the location of the boundaries of his or her property, a "stakeout" survey should be ordered.
4. What can be done to protect the purchaser of a new home when the builder has not completed the house?
Delaware's "New Homebuyer's Protection Act" addresses the problems arising from some builders' refusal to escrow funds at closing. The statute (Title 6, Chapter 36, Delaware Code) requires sellers of any new residential property (property never before occupied as a dwelling) to place sufficient funds in escrow to complete unfinished work.
- The rule only applies if the value of the unfinished work exceeds 1% of the purchase price.
- The escrowed amount must equal the market value of the work to be done or an amount set by contract.
- When the work is completed, the escrowed amount must be paid to the seller or vendor within 30 days.
- The work must be finished within 90 days (or as otherwise agreed) or the money is released to the buyer.
5. Is there a similar law protecting purchasers of existing homes if there is a "defect"?
Unfortunately, there is no statute which requires escrowing funds if there is a "defect" in the property which is discovered after the Agreement of Sale is signed but has not been cured by time of settlement. However, that does not completely answer the question.
If the defect is "material", i.e., it makes the property uninhabitable or deprives the purchaser the "benefit of his bargain", the purchaser can delay settlement or even rescind the deal (unless there are limitations in the Agreement of Sale). These remedies may be undesirable for any number of factors, e.g., it is difficult to tell a purchaser not to settle when someone else is waiting to buy his or her prior residence or when all the purchaser's household goods are already in a moving van. Most important, however, is the real intent of the parties -- the purchaser wants to buy and the seller wants to sell and they want to do it when planned. Rarely is it beneficial to cancel or postpone settlement unless the defect is a threat to health or safety.
Alternatives include adjusting the purchase price to compensate the purchaser for the loss in value of the bargain or escrowing sufficient funds to cure the defect after the post closing.
Either of these remedies may be less severe and acceptable to the purchaser and seller, but the settlement may still have problems -- the lower purchase price could cancel the purchaser's mortgage because the loan to equity ratio may be adversely impacted or because the defect would reduce the appraised value of the property or the lender may not agree to close if there is an escrow or may decide that the purchaser must put up the escrow funds not the seller.
Where the "defect" is not material, escrow or adjustment of price is available unless precluded by the Agreement of Sale. Occasionally, a seller may be unwilling to escrow or adjust the price. This situation requires the attorney and the Realtor. to use their best efforts to bring the situation to an amicable conclusion. Sometimes the defect can be cured in a few hours which would permit a brief postponement of settlement. If no agreement can be reached, the purchaser is left with no alternative -- settlement must go through.
Historically, acceptance of a deed precluded any action on the agreement of sale. However, recent case law has eroded that legal maxim and depending on circumstances, the purchaser may settle and later sue to recover damages from the seller for breach of the agreement or breach of warranty.
6. What if the defect is not disclosed on the Seller's Disclosure Form?
Delaware law requires that the seller of all dwelling units of 1-4 families residential properties disclose in writing all material defects of the property that are known at the time the property is offered for sale or become known prior to the time of closing. The disclosures are made on a form provided by the State of Delaware Real Estate Commission. The seller must make a good faith effort to complete the form accurately and any representation made in the document is not a warranty of condition. If the seller discloses any defect, he or she cannot be held responsible for correcting it, provided he has complied with the Agreement of Sale executed by the parties. Moreover, if the seller indicates that he or she lacks knowledge about a given condition, the buyer is put on notice to check out the situation. In short, the document acts as a shield to the seller regarding defects both known and unknown.
CONNOLLY BOVE LODGE & HUTZ LLP recommends that every buyer of real estate include both a home inspection clause and a warranty clause in the Agreement of Sale. The home inspection clause permits a buyer to hire a professional home inspector to review the condition of the improvements on the real estate, i.e., the building, its systems, roof and basement, etc. The warranty clause will warrant that the systems, etc. will be in operating condition at time of closing. These clauses may help reduce the occurrence of "surprises" after the settlement when the buyer moves into the residence. Moreover, early discovery of defects can minimize consequential damages, assure that the parties fully understand the condition of the property when the sale is consummated and can often avoid expensive litigation in the future.
7. How can a purchaser of real estate be certain not to be the victim of a mechanic's lien judgment?
The Smiths have found their dream home and have gone to settlement. Things couldn't get better. Then one day the Smiths come home from work to discover that the sheriff has nailed a mechanic's lien complaint to their front door. The Smiths are upset to say the least. They call their attorney and demand that he or she take care of this problem. After all, they've just made the biggest purchase in their life and now they are being sued for additional money! An unlikely scenario? Not at all.
Even though the settling attorney is required to perform a "bring down" on the property the day of settlement, this does not insulate the home buyer from exposure to a mechanic's lien suit. Delaware's Mechanic's Lien laws allow any person who has performed or furnished labor or material, or both, to file a mechanic's lien action within 90 days or before the expiration of 120 days from the last date that labor or materials were provided to the job. Different filing deadlines apply depending upon the identify of the contracting parties. Especially in new construction, there can be a subcontractor out there whom the general contractor, owner or developer has not paid who files a mechanic's lien against the Smith's property after it has gone to settlement.
Will the Smiths have to pay the subcontractor even though they have already paid the contractor in full? Will the Smiths mortgage be foreclosed on? Will they lose their house? The answer to these depends at least in part upon the Smiths knowledge or notice (or lack thereof) of the subcontractors' claim against the contractor or property. While owner's title insurance could protect them against this defect in title, there is still the possibility of being involved in a trial, being called as a witness, etc.
There are, however, two ways which the Smiths can reduce if not eliminate their exposure to a mechanic's lien judgment in these circumstances.
First, it is essential that the Smiths purchase owner's title insurance. This will pay the claim and any attorneys' fees associated with the suit. Most important, it will assure them that the mortgage will not be foreclosed on.
Even if the Smiths don't purchase owner's title insurance - which would not be the prudent thing to do - if they use their property solely as a residence and pay the contractor without notice of any outstanding claims against the contractor or property, the Smiths may avail themselves of the so called "good faith payment" defense.
To assure attaining the benefit of this complete defense, at settlement we insist that the contractor provide either: 1) a notarized, verified written certification that the contractor has paid in full for all labor performed and materials furnished to date in or for such construction; or 2) a written release of mechanics' liens signed by all persons who would otherwise be entitled to avail themselves of the provisions of the mechanics' lien laws. By taking these steps, one step further has been taken in protecting a client's interests and defeating potential mechanics' lien litigation.
Of course, a mechanic's lien filed before settlement is a defect in title and must be discharged or provided for to assure that the purchaser will be provided good fee simple marketable title. If a legitimate dispute exists between the seller and the contractor, an escrow or an interpleader of part of the settlement proceeds may be required. However, if the proceeds are insufficient to pay the lien, a legal action may be required to clear title unless all parties can agree including the contractor.
8. Why is a Buyer required to provide either a certified check, a cashier's or treasurer's check or wired funds at Real Estate Closings where the amount is over $2,000?
Checks which fail to clear the bank can wreck havoc on a seller who uses proceeds from one closing to buy a new home. In a domino like effect, when one check is returned for insufficient funds or because it has been drawn on an insolvent account, all subsequent checks relying on those funds are also returned. While it has occurred infrequently in the past, when it has occurred, the problems have been monumental, e.g., unsatisfied mortgages requiring continued payment of interest on the seller's old mortgage, ineffective transfers of property which impair the validity and priority of a buyer's new mortgage and many overdrawn accounts. And this continues for each transaction dependent on the prior transaction.
The Delaware Supreme Court has imposed rules intended to eliminate the potential problems created when at settlement a purchaser or lender tenders the settling attorney "uncollected" funds, e.g., checks drawn on insufficient funds or checks from an insolvent maker. No Delaware law firm or attorney can accept as part of the purchase funds:
a. A purchaser's personal checks in an amount exceeding $2,000;
b. Checks from lenders which are not certified, cashier's or treasurer's checks; or
c. Uncertified checks from brokers for any portion of the deposit money which exceeds $25,000.
The rule permits an attorney to disburse funds at settlement only if they are drawn on "good funds" which are limited to:
- 1) Cash;
- 2) "Wire transfers";
- 3) Certified checks;
- 4) Cashier's or treasurer's checks;
- 5) Escrow checks from a Delaware attorney or checks from an insurance company (i.e., a title insurance company) authorized to do business in Delaware;
- 6) Non certified checks less than $2,000 (or greater if the check has already cleared); and/or
- 7) Real estate broker's checks for up to the amount authorized by 24 Del. C. Section 2921, currently, $25,000.
In most instances our clients need certified checks or wired funds to complete settlement. By completing our title work as early in the process as possible and by timely retrieving accurate charges from the seller and lender, we are able to timely provide best estimate "figures" to our clients in time to obtain the "good funds" in time for settlement.
9. When a Buyer wants to rent out his former house, what are some of the pitfalls of using a Form Residential Lease?
Over the years, the Landlord-Tenant Code (hereinafter "the Code") has endured dramatic changes which create many pitfalls for the unwary landlord.
Many landlords are still using preprinted form leases - but most of these forms do not comply with the most recent revisions of the Code. It may be thought that using a form lease avoids legal fees and saves the landlord's money. But that is not always the case. Later court imposed liability can cost the landlord a lot more than the cost to have an attorney review and/or redraft the lease.
Failure to comply with certain provisions of the Code can result in a landlord being liable for up to three (3) times the amount of the agreed rent. In addition, form leases may not serve the landlord's best interests. We suggest that each form lease be reviewed carefully before it is used.
The form residential lease may contain many clauses which either violate the Code or may not be to the landlord's advantage. We highlight only a few provisions:
- Does the lease provide adequate space to prominently disclose the names and usual business addresses of all of the rental property's owners, appointed agents or landlords? Failure to do so may preclude both enforcement of some of the terms of the lease and some of the remedies afforded by the Code.
- Does the form lease assess the maximum five percent (5%) of rent for late rental payments? Also, the timing of the landlord's assessment of the charge for late rental payments may not be in compliance with the new Code, depending upon the location of where the rental payments are to be made. This could result in multiple damages if the late charge is improperly collected.
- Does the lease contain an accurate chapter number of the Code in the provision entitled "TERMINATION NOTICE"? Some of the chapters under the Code have changed as a result of the revisions, e.g., Chapter 5509 referred to in some form leases has been changed to Chapter 5314.
- Does the lease require a sixty (60) day notice of termination? Be sure to understand that the sixty day period begins to run on the first of the month following the giving of the notice.
- The types of fees a landlord may charge a tenant have been severely limited by the new Code. Although, a landlord may use the security deposit for reimbursement of reasonable expenses incurred in renovating and re-renting the premises caused by premature termination of the lease in certain circumstances, the landlord may not charge a flat re-rental fee.
- Certain provisions requiring the tenant to maintain the rental unit may be unenforceable because a provision requiring the tenant to perform specified repairs, maintenance tasks, alterations or remodeling, must be contained in a separate writing in conspicuous print. In addition, the separate writing must be supported by independent consideration and the type of maintenance required must meet certain qualifications under the Code. Failure to provide the separate writing can cost the landlord thousands of dollars under certain "handyman special" leases.
- Does the lease specifically state the location and account number of the tenant's security deposit? Although such location does not need to be contained in the lease, the Code provides that the tenant must be notified in writing of the location of the security deposit and we suggest that it be in the lease to avoid a claim that notice was not given.
- Does the lease require the tenant to notify the landlord if the tenant is going to leave the premises for an extended period of time?
- Does the lease contain a clause stating that the tenant has received a required copy of a summary of the Landlord-Tenant Code?
- If applicable, the lease should contain clauses and disclosures in satisfaction of the lead-based paint regulation.
- Does the lease contain a provision that the landlord's waiver of one provision in the lease does not constitute a future waiver of the same provision or a waiver as to all provisions? For example, the landlord may not desire the consent to one sublease to constitute the landlord's consent to all future subleases.
10. What are the requirements for sales or leases of residential property regarding lead-based paint?
Federal law requires certain disclosures relating to lead-based paint in many sales and lease transactions involving residential dwellings constructed before 1978, with some exceptions. Before the sale or lease of the property, the seller, landlord or agent of the seller or of the landlord (such as a real estate agent or an attorney) must provide the prospective buyer or tenant with the EPA's pamphlet, Protect Your Family From Lead In Your Home and provide copies of any relevant records. In addition, the seller and landlord must disclose all information they possess regarding the presence or absence of lead-based paint.
Buyers must be given at least ten (10) days to inspect the premises for the presence of lead paint unless the parties mutually agree otherwise. Furthermore, the sales contract or lease must include the following: a lead warning statement; information the seller or landlord have about lead paint or lead paint hazards or a statement that the seller or landlord do not possess such knowledge; a list of the relevant records provided to the purchaser or lessee or a statement that there are no such records; a statement that the broker or agent, if any, have informed the seller or landlord of the regulations' requirements and of the duties to comply; and, regarding sales contracts, a statement that the buyer has been given at least ten (10) days to inspect the premises for lead paint or have waived such opportunity.
Although the regulations do not impose an affirmative duty upon the seller or landlord to actually inspect for lead, anyone who knowingly violates the regulations will suffer stiff penalties including; joint and several liability in an amount equal to three (3) times the amount of damages sustained by the purchaser or lessee; a potential of paying of the purchaser's or lessee's attorneys' fees, expert witness fees and costs; and civil and criminal penalties of up to $100,000 per violation.
11. Why do some properties which were never in a flood plain now require flood insurance? Is there anything that can be done to avoid the requirement?
On April 17, 1996, the Federal Emergency Management Agency (FEMA) published new maps that designated some areas of New Castle County as "flood zones." As a result, the owners of some properties -- both residential and commercial - now may be required to purchase federally-issued flood insurance where none was previously required. Current property owners may be exempted from the coverage requirement, but new owners, i.e., the new client-purchasers, may have to buy it -- increasing settlement costs and monthly carrying charges, and potentially impacting the sales price of the property.
Before selling a property, a seller should determine if it is now in a flood zone and disclose this information at Question 36 on the Delaware "Seller's Disclosure of Real Property Condition Report." Flood certifications are available from local surveyors and other "flood zone specialists." A buyer should verify that the property is not in a flood zone. If there is any doubt, or there is insufficient time for verification, we recommend inserting a warranty to that effect in the sales contract. By following these practices, Realtors., sellers and buyers can minimize the costs and vexation of a lawsuit for rescission of the contract and/or potential damages.
The procedure to appeal a new flood zone designation can take up to three months. If the owner believes that the designation is in error because there is no risk of flooding and if time permits, an application for a "Letter of Map Revision" including a survey with elevation certifications may be filed with FEMA. If successful, the appeal could remove the property from the flood zone and result in a refund of flood insurance premiums. If, however, the property is at risk of flooding, flood insurance, though costly, may still be essential.
Even though the structure on the property is "removed from the flood zone", the mortgage company may still require flood insurance. Each company has its own policy. So, before you go to the expense of appealing the designation, be sure to check with the mortgage company.