Types of Deeds Used in Real Estate Transactions

We often focus on the importance of the real estate contract in a transaction, because this document sets forth all terms of the deal and is legally binding. However, signing a real estate contract does not equate to a transfer of property. Only when the buyer holds a deed from the seller, does he or she actually own the property in question.

A typical real estate deed must contain:

  • a detailed description of the property
  • the name of the person to whom the property is being transferred (the transferee)
  • the signature of the individual or entity transferring the property (usually the seller), acknowledged by a notary

The deed must be delivered to, and accepted by, the transferee, before it becomes effective. The transferee may then record the deed with the Recorder’s Office in the County where the property is located.

The information contained on the deed is fairly straightforward; however, there are several different types of real estate deeds which may be used to convey property. The type of deed used in a transaction is based upon the degree to which the seller warrants the title being conveyed to the buyer.  There are three levels of deeds.

A Grant Deed (also called a Special Warranty Deed) (the middle level) is the most common type of deed used in California real estate transactions. When a seller conveys property to a buyer by Grant Deed, the seller guarantees that he or she holds title to the property and has not previously transferred title to anyone else.  A Grant Deed can include exceptions to the title guarantee. The Grant Deed may, for example, identify an easement running across the property. Any exception listed in the grant deed will not be covered by the title guarantee, so the buyer takes title subject to those listed exceptions.

A Warranty Deed (the top level) is less common in California and explicitly guarantees that the seller has good title to the property, meaning it is free of liens or claims of ownership.  It may make other special and particular promises to the transferee, to address particular problems in the transaction.

A Quitclaim Deed (the bottom level) transfers all interest the seller has in the property.  In other words, a seller conveying title by a Quitclaim Deed essentially says, “I  may or may not have any interest in the property but I convey to you whatever interest I do have.” This type of deed contains no guarantees of the seller’s title to the property, so the buyer cannot sue the seller if problems with the title later arise.

A Trust Deed, although called a “deed,” does not permanently transfer title to property.  It is a device  used to encumber property as security for a loan.  There are three parties to a Trust Deed:  Borrower, Beneficiary (i.e., Lender) and Trustee.  The Borrower signs the Trust Deed, thereby transferring legal title to the Trustee (usually a title company).  The Trustee holds legal title to the property for the benefit of the Lender.  The Trustee acts at the direction of the Lender. When the loan is repaid, the Lender instructs the Trustee to reconvey the Trust Deed.  The Trustee reconveys the Trust Deed, thereby removing the encumbrance from the property.  If the Borrower defaults on the loan, the Lender has the right to foreclose and force a sale of the property to pay the loan.

Whichever type of deed is used in a real estate transaction, problems can and do sometimes arise after closing. If you have a question about the deed to your property, consult with an experienced real estate attorney about your rights.

No Relationship, No Failure to Disclose!

Many factors are weighed before most buyers decide to proceed with a purchase of real estate. Many buyers, both commercial and residential, will seek information about the property from a variety of sources. Aside from consulting with their realtors, they may ask questions of insurance agents, home inspectors, or even neighboring owners.

Sometimes, buyers experience what we call “buyer’s remorse.” This usually happens when aspects of the property do not match their expectations. When those expectations are based on advice they sought before completing the purchase, the buyer can feel understandably tricked or even manipulated into the decision go forward with purchasing the property.

Occasionally the grievance is so serious that the buyer decides to pursue a “fraudulent nondisclosure” lawsuit. . What this means is that someone involved in the transaction, usually one who had a legal duty to disclose material information, either failed to do so or even outright lied.

If the person who failed to disclose information was the seller or the seller’s or buyer’s real estate agent/broker, there are statutory and case law standards that govern what must be disclosed during a residential real estate purchase, and by whom. When the failure to disclose is by someone not directly related to the transaction, such as a neighbor, usually such nondisclosures cannot be the basis for a lawsuit. For example, if the buyer obtained inaccurate information from a neighbor about easements across the property and then relied on the information obtained in making the decision to purchase the property, liability is very questionable.

Courts will generally find that a defendant cannot be held liable for nondisclosure when there is no transaction between the defendant and the plaintiff, or when no “relationship” between the defendant and the plaintiff exists. The bottom line is that before a buyer can file a lawsuit for failure to disclose, the buyer or buyer’s attorney must first establish whether the potential defendant even had a legal duty to disclose in the first place! This is an issue buyers should discuss with an experienced real estate attorney, before jumping to any conclusions.

Escrow Instructions Are Essential to Real Estate Transactions

As real estate attorneys, we often find that escrow instructions are important when attempting to resolve disputes related to real estate sales. While the purchase agreement terms govern the specifics of the transaction, escrow instructions are the rules by which those terms are mechanically accomplished. In the standard residential purchase agreement used in most transactions, the California Residential Purchase Agreement and Joint Escrow Instructions (CAR Form RPA), the basic escrow instructions have been incorporated into the purchase agreement. The escrow company acts as the neutral third party that coordinates all the necessary acts and documents for closing the purchase and passes the various funds. (This system is different than the “table closing” buyers and sellers are used to in many other parts of the country, where the principals and their lawyers sit around a table and close the transaction in one sitting.)

Both buyers and sellers should carefully analyze the instructions incorporated into the RPA before signing so that there are no unpleasant surprises later. The “escrow instructions” portion of the RPA instructs the escrow agents how to perform or coordinate certain specific items, such as:

• the date the buyer is entitled to possess of the property
• how to vest the buyer’s title to the property
• instruments and documents that must be signed and delivered to escrow
• which parties pay various fees related to the transaction
• the closing date for the sale

The escrow company, in addition to the instructions which are part of the RPA, will also provide its own specific instructions related to various aspects of the transaction, and will also have its “general instructions” which generally govern all aspects of what they do during the escrow. Please read these instructions carefully; they limit liability and may direct how the escrow company is to resolve certain disputes.

When something goes awry in the real estate transaction process, both buyers and sellers should review the RPA and its included escrow instructions, and any other special or general instructions issued by the escrow holder. This will help each party to determine whether all involved agents and parties have followed through with their stated obligations. Often the problem lies in someone’s misunderstanding of his or her role in the process, but occasionally we find that one or more parties has deliberately acted in disregard of the RPA or the escrow instructions.

As airtight as this process may appear, real estate attorneys are often asked to negotiate conflicts arising from one or more parties failing to follow escrow instructions. Buyers or sellers who have experienced problems with the transaction or escrow processes should consult with a real estate attorney who is familiar with escrow instructions in both commercial and residential real estate transactions.

What Happens During the Due Diligence Period on a Residential Purchase?

Whether you’re buying or selling real estate, it is exciting to finally have a drafted and signed sales contract in your hand.  But of course, something can still go wrong in the “due diligence period.”  This is the period between signing the contract and the removal of the buyers’ contingencies, before actually closing the deal, during which buyers and sellers perform actions needed to complete the sale.

There are various contingencies which may be included in the sales contract.  The contingencies discussed below are pre-written into the standard residential sales contract, unless negotiated out by the parties.  During the due diligence period, difficulties in any of these areas can complicate the transaction.

Financing. Most buyers need to use some form of financing in order to purchase real estate. Sales contracts generally acknowledge this fact and include a contingency stating that the sale will not proceed if the buyer cannot obtain appropriate financing. The buyer is given a certain amount of time to secure financing. While it can be frustrating for sellers to lose a sale due to buyers’ inability to secure financing, there is generally no way to force a buyer to pay without financing. From the buyers’ perspective, obtaining a commitment for financing during the financing contingency period and then having the funding actually materialize are both potential issues.

Inspections. When a buyer makes an offer on real estate, the offer generally includes a contingency relating to inspections of  the property. Since many problems cannot be seen with the naked eye, during the due diligence period the property is typically inspected by the buyer’s retained home inspector for issues such as foundation problems, issues with plumbing and electrical wiring, and so on.  The agents also have an obligation to inspect, but they are not professional inspectors and should not be used as a substitute for a professional inspection.  Often the seller will be given the option of repairing any problems so that the sale can then proceed, or providing a credit to the buyer to “fix” any problems uncovered. Typically the inspection contingency will allow a buyer to abandon the transaction if problems are discovered and an agreement to with the sellers to resolve the problems cannot be reached.  Problems are typically resolved either by the seller issuing a credit to the buyer or remedying the problem.

If either the buyer or seller cannot complete necessary actions within the due diligence period, they can request an extension on those contingencies. The seller, however, can force the buyer to either remove the contingency or cancel once the contingency period ends.  Disputes over contingency removal typically lead to fights over the right to the buyers’ deposit.  Principals to a residential transaction should only consider litigation (usually preceded by mandatory mediation) after consulting with a skilled real estate attorney, who can advise the parties on their rights and an appropriate course of action.

 

Important Updates to the California Residential Purchase Agreement

For the first time since 2010, in October, 2014 the California Association of Realtors issues a complete make-over of the standard Residential Purchase Agreement (RPA), the standard residential purchase agreement used in the overwhelming majority of California home sales. While use of the RPA is not required by any law, it remains the standard document used by real estate agents to negotiate residential real estate transactions in California. Some of the more significant changes to the document for the principals in a sale transaction can be found in these following areas.

Lender limits on buyer credits. Combined with new federal regulations affecting disclosure requirement for lenders, which come into effect on August 1, 2015, new contract provisions may lengthen the time necessary to obtain and close on funding for a purchase.  Among other things, buyers who reduce the price of a home by seeking credits will have to disclose these credits to their lender. Depending upon the lender, the buyer may face consequences for taking these credits.

 Loan contingency. Under the new contract provisions (which are under review and may be changed), the pre-designated period for an appraisal contingency is 17 days, while the loan contingency is at 21 days.  The result is that after the appraisal contingency is removed, failure to obtain a loan because the property does not appraise will not permit buyers to cancel without losing their deposit.  The buyer should attempt to get these contingencies to be the same length.

 Termite provisions. This one is of particular importance for real estate agent in Southern California. The termite report was previously addressed in a separate addendum that typically resulted in the seller agreeing up front to pay for “section 1” repairs.  That addendum has been eliminated so that now the pest report is treated as any other inspection – the buyer has to request repairs and the seller may or may not agree.  The best way to address this issue is for the seller to obtain the termite report up front, before receiving offers, in order to know exactly what costs will be in play during negotiations.  That way the seller can build repair costs into the price negotiations.

 Assignment of the RPA.  Contracts in California are typically assignable.  The revised RPA gives the seller the right to reasonably approve assignment of the contract.  Investment buyers need to take this fact into account when planning purchases

 Representative parties. There is a new addendum for parties buying or selling in a representative capacity, whether via a trust or an entity, that will set forth the parties and the appropriate signers on behalf of those parties once, and up front in the transaction.  This should eliminate signing problems.  If you are buying or selling through an entity, remember that the title company is going to ask for the underlying entity documents before closing, so prepare those beforehand to avoid holding up the close of escrow.

 For more information on how the Residential Purchase Agreement has changed, contact an experienced real estate attorney.

In Contract Disputes, Context is Everything

In any real estate deal, the contract governs the entire transaction. Generally speaking, you would think that having all agreements written into a contract means the deal is “set in stone” but in practice the typical real estate transaction includes multiple contingencies. More significantly when it comes to real estate disputes, we often see that one or more parties disagree on the meaning of language included in the contract. This is particularly true when one party did not consult with a real estate attorney prior to signing a contract with more complex provisions or processes.

Sometimes these situations arise due to “confirmation bias”. This means that one or both of the parties interpret certain clauses or phrases in a manner that supports their pre-conceived notion of the way they think things should be. Unfortunately, emotions often drive these perceptions and the end result is that logic goes out the window and both parties insist that their view of the contract is the “right” view.

When initial attempts to solve the dispute fail, the case often proceeds to a mandated mediation, followed by arbitration or court. The idea of mediation is to find a neutral third party, who can hopefully detangle the complex real estate contract and determine what was meant by the disputed language. If it isn’t done voluntarily through mediation, it will be finally and firmly done by an arbitrator or court, and to one party’s advantage.

When conflicts proceed this far, the first step for the mediator or judge is to decide whether the language is ambiguous in nature. When language is found to be unclear, the point of mediation or court proceedings is to determine the intent of each party when signing the contract. Therefore, the overall context of the entire contract will be considered. Of course, no one can be a mind reader, so it can be frustrating for either party in the conflict to have their intent called into question.

A good real estate contract should not include ambiguous language for precisely this reason. What you think you’re signing may not be what you are actually signing! Any time you write a real estate contract with other than the usual provisions found in the standard residential purchase agreement, it’s important to consult with an experienced real estate attorney.

When Can a Tenant Break a Commercial Lease?

While there are many reasons a tenant might need to break a commercial lease, two of the most common reasons involve the success of the business. Either an unfortunate turn of events leads to the end of the company, or the business has grown so quickly that a new, larger space is needed right away.

Whatever the reason, sometimes you may need to end your lease earlier than expected. As in most legal situations, the best solution is pre-planned prevention. In other words, the tenant will have inserted clauses into your original agreement detailing which circumstances will allow you to terminate the lease if sales projections fail to reach projected limits – most landlords will not accept such provisions – or more likely rely on a provision permitting the tenant to assign the lease or sublease the property.

If a tenant did incorporate “early out” language in the lease, terminating it may be as simple as reviewing the original document, making sure your situation meets the agreed-upon standards, and then notifying the landlord in writing of the situation. This underscores the importance of consulting with a real estate attorney before ever signing a commercial lease.

On the other hand, absent an “early out” provision, the tenant might still have several options:

1. If the space has increased in value such that the market rate is higher than the lease rent rate, the landlord might accept the property back in order to relet it at a higher rate. Even if the landlord is unwilling to take back the space, it may be possible to assign or sublet the leased premises. Again, it is important to make sure that the assignment and/or sublease provisions in the lease are not an impediment to that strategy for the tenant. In any event, a sublease or an assignment generally require the landlord’s consent which, again generally, cannot be unreasonably withheld.

2. Walking away from the lease is problematic, especially since many landlords require personal guaranties on commercial leases for other than very strong tenants. The law does require the landlord to mitigate its damages by taking reasonable measures to relet the property, but the damages can mount quickly and the attorney’s fee clause in most leases make fighting a mitigation case not economically feasible for most tenants.

3. Negotiate with the landlord. He may agree to settle for less than the full amount owed.

4. If you believe you need to walk away from the lease due to building safety, management practices or some other landlord breach, please consult with an experienced real estate attorney. Such actions are difficult to support and can be extremely expensive.

Keep in mind that breaking a lease can carry serious financial consequences, depending upon the terms of your original agreement. Always seek professional advice and attempt to mediate any problems before you reach the critical point of walking away from your legal obligations. More important, since almost all commercial leases are provided by the landlord, make sure that the commercial lease you sign has been properly reviewed by a real estate attorney so that you can negotiate those terms that are most important to you as a tenant.

Full Disclosure Protects Real Estate Buyers and Sellers

Real estate sales and purchases are some of the largest financial transactions many of us will experience in our lifetimes. Since such a large amount of money and a lengthy time commitment are involved, both buyers and sellers of real estate can often experience remorse after closing the deal. This is particularly true when additional information, which may have changed certain aspects of the agreement or canceled it entirely, is discovered after closing

Fortunately, the policy of “full disclosure” can help protect buyers from potentially disastrous situations, and helps protect sellers against lawsuits.  California has one of the most strict set of disclosure laws in the country.  Your real estate agent should be fully aware of these disclosure requirements, but a real estate attorney can help you if you have detailed questions about your rights or obligation to full disclosure.

Full disclosure also extends to real estate agents, meaning those who represent either principal must disclose all information known by them about a particular property, whether discovered through their own required diligent visual inspection or learned of otherwise, e.g. from the proverbial nosy neighbor. Full disclosure covers items that might not be immediately obvious, such as:

 

  • any relationship to the buyer
  • any information known pertaining to the buyer’s financial ability to complete the transaction
  • any other information which would allow the seller to obtain the highest possible price at terms most favorable to the seller
  • any personal relationship to the seller, or whether the broker has any interest in the sale
  • figures or estimates pertaining to the value of the property
  • knowledge of any current offers on the property
  • any other knowledge that would allow the buyer to purchase the property at the lowest possible price, under the best terms for the buyer, or for the reverse for the seller

 

The burden of disclosure, of course, falls most heavily on the sellers, who have the knowledge of information that might affect the “value or desirability” of the property (the legal standard).  Sellers, the only way to protect yourselves against post close-of-escrow lawsuits is to disclose fully, and early in the transaction when the parties are not fully invested in the transaction.

 

Breach of Contract in Real Estate Transactions

The key element to any real estate transaction is the sales contract. When buyer and seller agree upon terms such as price, time period to close the deal, payment of closing fees and other important factors, each party signs a legally binding agreement. This sales contract may also contain contingencies, or clauses which state that the contract will be void or voidable if certain conditions are not met. Both buyer and seller can include certain contingencies in the contract.

It sometimes happens that a transaction falls part, and the contract is voided, due to the fact that one or more contingencies were not met. This is not a breach of contract because the contract clearly stated that the transaction would not proceed under these circumstances.

However, sometimes the buyer (and occasionally the seller) backs out of the agreement for reasons not covered under the contract’s contingencies. This does indeed qualify as a breach of contract.

If the buyer is backing out, the seller may wish to take the case to court. After all, they are understandably upset at the inconvenience this situation has caused to them. But before rushing to court, sellers should seek to understand the reason behind the breach. Since courts usually recognize that buyers face numerous obstacles to purchasing a home – such as securing a mortgage, selling their old home, and getting together cash for down payment and closing fees – it is extremely rare for a court to force a sale to proceed in the face of a buyer’s attempt to cancel. In this case, going to court would almost certainly be a waste of time and money.

However, if the breach of contract is on the seller’s side, the reverse is not true. Since real estate is something for which the law provides that money is not an adequate substitute, a buyer who is complying with a contract can often successfully force the seller to consummate the sale. In these cases it is critical to speak to an experienced real estate attorney as soon as possible.

If the buyer provided an “earnest money” deposit when signing the original sales contract on the property, the contract often contains a “liquidated damages” provision that entitles the seller to keep that money when the contract is breached or canceled in bad faith by the buyer. It will depend, of course, on those all-important contingencies in the original contract.

Before attempt to force a sale or fight over possession of a deposit, both buyers and sellers would be wise to consult with a real estate attorney. Expert guidance can help buyer or seller decide what their next step should be.

Breach of Contract in Real Estate Transactions

The key element to any real estate transaction is the sales contract. When buyer and seller agree upon terms such as price, time period to close the deal, payment of closing fees and other important factors, each party signs a legally binding agreement. This sales contract may also contain contingencies, or clauses which state that the contract will be void or voidable if certain conditions are not met. Both buyer and seller can include certain contingencies in the contract.

It sometimes happens that a transaction falls part, and the contract is voided, due to the fact that one or more contingencies were not met. This is not a breach of contract because the contract clearly stated that the transaction would not proceed under these circumstances.

However, sometimes the buyer (and occasionally the seller) backs out of the agreement for reasons not covered under the contract’s contingencies. This does indeed qualify as a breach of contract.

If the buyer is backing out, the seller may wish to take the case to court. After all, they are understandably upset at the inconvenience this situation has caused to them. But before rushing to court, sellers should seek to understand the reason behind the breach. Since courts usually recognize that buyers face numerous obstacles to purchasing a home – such as securing a mortgage, selling their old home, and getting together cash for down payment and closing fees – it is extremely rare for a court to force a sale to proceed in the face of a buyer’s attempt to cancel. In this case, going to court would almost certainly be a waste of time and money.

However, if the breach of contract is on the seller’s side, the reverse is not true. Since real estate is something for which the law provides that money is not an adequate substitute, a buyer who is complying with a contract can often successfully force the seller to consummate the sale. In these cases it is critical to speak to an experienced real estate attorney as soon as possible.

If the buyer provided an “earnest money” deposit when signing the original sales contract on the property, the contract often contains a “liquidated damages” provision that entitles the seller to keep that money when the contract is breached or canceled in bad faith by the buyer. It will depend, of course, on those all-important contingencies in the original contract.

Before attempt to force a sale or fight over possession of a deposit, both buyers and sellers would be wise to consult with a real estate attorney. Expert guidance can help buyer or seller decide what their next step should be.

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