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Negotiating Listing Agreements

By Laurie Murphy

Now that the worst of the recession seems to be abating and you are one of the sellers who has been waiting in the wings for the past few years but ready now to take the plunge, you've selected a broker to represent you but your work does not end there.

Brokers and agents throughout the state use standard California Association of Realtors forms for every major aspect of the purchase and sales transaction.  You, as the broker's client however, are not stuck with these forms which are created by lawyers whose sole purpose is to protect the brokers and agents. 

The first significant form you as the seller will be presented with is the Residential Listing Agreement.  This is the agreement that gives the broker the right to list your home for sale.  Most agents or brokers will present this to you as just another form which you must sign "as is" to get your house sold.  Don't fall for it.  Many of them will tell you that 6% commission is standard.  It is not.  Certainly for the higher priced homes, most brokers will take a listing for 4-5%.  Also, if the transaction is an "in house" one, where the same agent represents both the seller and the buyer, most brokers will agree to even a lower commission since the entire transaction will be handled by the same people. 

This standard listing agreement contains many other traps for the unwary seller.  Unless modified, the broker is entitled to a commission if the property is not sold but leased instead and they will take their full commission out of your first rent check.  If they bring you a buyer who does not perform and you end up having to sue the buyer, the standard listing agreement requires you to pay their commission out of the proceeds of any settlement reached with the buyer or judgment obtained.  And, if you happen to retain a second broker after the first one is not successful in securing a buyer and the initial broker gives you a list of people he showed the home to, that person looks at it again and decides to purchase it, and you don't exclude that sale from the second listing agreement you signed, you could find yourself owing both brokers a commission. 

Many deals go through without a hitch but if yours does not, you do not want to be on the bad end of an agreement designed solely to protect your broker and agent.  Demand appropriate revisions to these standard agreements up front.  Once the deal goes south it will be too late.

 Contact M. Laurie Murphy

What You Should Know About Title Insurance (Part 1)

By Laurie Murphy

When you buy real property it is customary for the purchase agreement to require that a seller also provide  (as a condition for sale) a policy insuring title.  What exactly is covered however by the policy that the seller provides the buyer?  And, more importantly, why should you, the buyer care?  There are generally two kinds of policies that cover buyers of California real estate.  The first is called a California Land Title Association Policy (referred to as a CLTA Policy).  The second is an American Land Title Association Policy (referred to as an ALTA Policy).   

The CLTA policy is more restrictive than the ALTA policy which typically includes a survey of the property's boundaries, is more expensive and takes longer to obtain.  The basic difference between the two polities is that the CLTA policy primarily insures the buyer against title defects discoverable only through an examination of the public records.  

An ALTA on the other hand policy extends to certain off-record title defects.  These off-record title defects can include building permit violations, post–policy encroachments and forgeries.  Generally a title policy will insure against defects which affect the marketability of title.  Marketability of title coverage does not typically include defects which affect the market value of property.  Marketability of title and market value of property two distinct concepts which buyers must understand when acquiring title insurance.   In subsequent blogs, we will address these concepts as well as standard endorsements and exclusions in CLTA and ALTA policies.

Contact Laurie Murphy at mlm@vrmlaw.com

Additional Relief For Short Sellers Of Real Property

By: Arlen R. Gunner, Esq.

Numerous homeowners have found themselves in the unenviable position of having to sell their homes for less than the amount they owe. This situation is commonly called a short sale. On September 30, 2010, the California legislature provided some initial relief for short sellers who obtained the consent of the First lien holder to the short sale. The law that became effective on that day created a new Section 580(e) to the California Code of Civil Procedure which required that no judgment can be rendered for any deficiency under a note secured by a First deed of trust or First mortgage for a residence in any case where the owner sells the residence for less than the amount owed at the time of sale so long as the written consent of the lender is obtained. Once the lender gives its written consent, it must accept the net sale proceeds as payment in full, and must fully discharge any remaining indebtedness on the First deed of trust or First mortgage. An exception to this rule occurs if the borrower commits fraud or waste with respect to the residence.

This statute, although well intended, did not protect the borrower in situations where the borrower had also placed a Junior lien on the residence. To correct this problem, the legislature passed an amendment to Section 580(e) on July 15, 2011 which expands Section 580(e) to prohibit a deficiency judgment upon all notes secured by deeds of trust or mortgages which encumber a residence. In any case where the borrower sells a residence for less than the remaining amount of all loans, and at the time of the sale it has the written consents of all lenders, then no deficiency judgment can be obtained against the borrower by any lien holder. The bill also provides that when the note is not secured solely by a deed of trust or mortgage on a residence, no judgment shall be rendered for any deficiency if the borrower sells the residence for a sales price less than the amount owed in accordance with the written consent of the lenders. Additionally, the law prohibits the lender from requiring that the borrower pay any additional compensation or consideration aside from the proceeds of the short sale in exchange for the written consent of the lender.

This new Section only applies if the borrower is an individual. It is not available if the borrower is a corporation, limited liability company, limited partnership or a political sub-division of the state. Nor shall this Section apply to any deed of trust, mortgage or other lien given to secure the payment of bonds or other evidence of indebtedness authorized or permitted to be issued by the Commissioner of Corporations or that is executed by a public utility.

The provisions of this Section cannot be waived and any attempt to do so will be void as against public policy.

This new statute, as amended, does not change existing law where no deficiency can be obtained in connection with the foreclosure of a purchase money loan or a loan that is secured by deed of trust or mortgage that is foreclosed pursuant to a power of sale.

Environmental Due Diligence Critical In Any Real Estate Transaction

By Arlen Gunner

Due to the fact that any person or entity that takes title to real property has essentially perpetual liability for environmental matters (with a few very narrow affirmative defenses that are difficult to prove) under both federal and state of California laws, it has become increasingly important that some level of environmental due diligence should be performed as a condition to closing a transaction involving real property.

Several different situations concerning the environmental condition of real property that was the subject of a long-term ground lease, where one of our clients was the lessor and another was contemplating becoming the lessee, have crossed my desk in recent months. I have also addressed situations on behalf of certain nonprofit clients who were scheduled to receive real property as charitable donations. In reviewing the environmental condition of the properties involved in the aforementioned situations, the environmental condition of each of the separate properties was a determinative factor as to whether or not the transaction would proceed.

One of our clients held title to real property for a long period of time upon which the client was operating a profitable business. Due to overtures made by a very financially stable potential lessee, a long-term ground lease was contemplated and a great deal of time was spent negotiating the proposed lease. The lessee had a contingency in the lease running in its favor which stated that the environmental condition of the property had to be acceptable to the lessee in its sole and absolute discretion.

When an environmental inspection was conducted it was discovered that there was underground hazardous material migration affecting our client's property, which emanated from a nearby gas station. Our client also was informed that the Regional Water Control Board was already monitoring the situation and eventually included our client's land in its investigation thus causing our client a great deal of out-of-pocket expense and a loss of the transaction since the lessee had a cancellation right if the environmental condition of the property was not satisfactory to it.

In another ground lease transaction where one of our clients was contemplating acquiring the tenant's interest under the lease, as well as fee title to other assets owned by the proposed transferor, our client was initially hesitant about incurring the expense necessary to conduct a Phase 1 review of the property in question. With a certain level of persistence (some might call it nagging) the client eventually ordered the Phase 1 report to be prepared by an environmental consulting firm. Within a short period of time, our client's environmental consultant uncovered a serious contamination issue which potentially could have had immense financial liability consequences for our client should it have closed the transaction and enterrd into the chain of title.

I am currently working on a probate situation where the trustee of an estate has instructions to convey the real property to one of our nonprofit clients as a gift. We have advised our client that it should perform the ordinary and customary real estate due diligence that would normally be performed if it was going to buy the property in an arm’s length transaction. While this may cause our client some upfront expense, the cost and expense would be de minimis if the property has any environmental liability attached to it.

One must also keep in mind that any lender, before it will be obligated to fund a loan, will in virtually every instance, involving real property, require an environmental Phase 1 report to be prepared at the borrower's expense, and they would probably also require an indemnity for environmental matters from not only the borrower but also its constituent stakeholders.

In the real estate market that currently exists, the longer a period of time that a property has been in service, the greater chance of environmental contamination coming into play due to the unknown prior uses of the property. Therefore, regardless of what position a client has in its transaction, an environmental review is more than ever a necessary due diligence contingency item.

(Mr. Gunner was named a “Super Lawyer” in 2008 in three practice areas: real estate, corporate and business, and mergers and acquisitions. Arlen was named a “Super Lawyer” in 2009 and 2010 in the area of real estate and also in 2010 as corporate counsel.)