Transactional work is practical in nature. Rather than looking backwards to piece together the facts of your client in litigation work, transactional work works with a client with an eye towards the future. In this case, your client has goals, aspirations, dreams, and a vision for growth. They simply need a lawyer to help those dreams become a reality. So, what do lawyers do that can help? For a real estate transaction, the lawyer needs to 1) strategically craft the proper documentation, 2) manage when the transaction occurs, and 3) mitigates the risk by identifying, reducing, and shifting the risk.
Types of Real Estate Transactions
Nowadays, there are typically two types of real estate transactions: residential and commercial.
Residential transactions have become more saturated with non lawyers where most of the legal work can be completed via standardized forms and basic online searches. As a result, residential transactional lawyers typically find success in one of two ways: 1) increasing the volume of their cliental and creating cheap standardized means of satisfying their needs, or 2) tacking residential real estate sales as a side job in connection with other forms of legal practice (such as estate planning).
Commercial transactions requires a much more extensive knowledge of market factors in addition to the legal knowledge. Consequently, the field has not been saturated with non lawyers because these transactions tend to be much more complex.
Real Estate Brokers
The first step of selling real estate is by finding the parties necessary to facilitate a sale (a seller and a buyer). A broker is often used to find these parties. Because of the sensitive nature of home-buying, brokers are often regulated by law. Many brokers become members of the National Association of Realtors (NAR). A member of the NAR is called a realtor. As such, many people consider brokers and realtors as synonymous.
Brokers are typically hired by the sellers and paid in a commission basis. The broker’s right to payment comes from an agreement between the seller and broker called a listing, which is often governed by the state where the deal is taking place (see the case below). There are four main types of listings that provide varying levels of control to the seller and the broker:
- Open listing – Any broker can sell and the first to sell gets the commission. If the property is sold by the owner (For Sale By Owner or FSBO), then no commission is paid.
- Exclusive agency – Only brokers from an agency can sell. If a sale is facilitated without the agency, then the agency is still entitled to their commission. However, if the sale is a FSBO, the agency receives no commission.
- Exclusive right to sell agreement – Only the hired broker has the right to sale. Any sales facilitated without the broker will still entitle the broker to a commission.
- Net Listing – A seller wants to recoup a sum of a property. The broker is entitled to set the listing price higher and recover any surplus made within the sale.
Many brokers utilize a Multiple Listing Service, where the listings can be placed online for all potential buyers to view.
Samann L.C. v. Victory Lodging, Inc.
For a commission to be paid, there must be a valid listing agreement between the parties.
Iowa law required that the commission is to be listed in a valid listing agreement. Here, there is no listing agreement. The oral agreement in addition to the addendum does not meet the requirements of a listing agreement. Thus, there can be no means of recovery for the commission total.
Real Estate Transactions Timeline
“The informational stage.” This period is when the parties have identified each other and are exchanging information that is necessary to facilitate the sale but retain enough information for negational leverage. There may be mandatory disclosures, but this stage appears to be mostly a battle of wits.
If the parties elect to go forward, they enter into an executory contract where the parties agree to complete certain tasks before closing. At this point, the doctrine of equitable conversion applies. That is, title is split between the buyer and seller. The seller has legal title and the buyer having equitable title.
At the end of the executory period, the parties meet to “close” the deal. Here, deed documents are transferred and payment is made. Along with the deed the seller is likely to provide covenants (warranties) to the buyer.
Finalizing all the paperwork by recording the transaction and obtaining insurance.
Brokers Duties to Clients
Rangel v. Denny
The duties owed by a broker include:
- Performing the terms of the brokerage agreement
- Promoting the best interest of the client by seeking transactions at a fair price, presenting the property in a timely manner, and timely accounting for the client’s finances.
- Show reasonable skill in providing brokerage services.
Rowedder v. Helkenn
A real estate agent needs to act in the best interest of the client, inform the client of the value of the land, and attempt to sell the land for as much as possible. If the client wishes the land to be sold at a lesser value, the agent should do some investigating to determine why the client would want the lesser value.
Expert testimony is to be provided to determine what the duty of a real estate agent is. As stated above, a real estate agent needs to act in the best interest of the client, inform the client of the value of the land, and attempt to sell the land for as much as possible. If the client wishes the land to be sold at a lesser value, the agent should do some investigating to determine why the client would want the lesser value.
Brokers have a duty of reasonable care, diligence, and judgment to obtain the best possible outcome for their client.. These are very similar to the fiduciary duties owed that we learned in Business Associations.
Lawyers Acting as Brokers
Depending on the state, lawyers can act as brokers without a broker’s license at varying degrees of control.
In re Roth
An attorney can act as a broker without having a license if the broker actions are merely incidental. There can be no dual compensation. Additionally, if an attorney is also a licensed broker, the practices must be separate and there can be no dual compensation.
The Pre-Contract Stage
Simple rules may have some big consequences. So, it is up to the attorney to not only understand the rules, but know what impact those rules may have in the long run.
For instance, rules that every contract needs to have is:
- A grantor and grantee (seller and buyer)
- The right to assign rights unless otherwise stated (can’t assign more than you have)
Letters of Intent, Options, and Enforceability
Real estate contracts are conducted by contract. Consequently, contract rules such as the parol evidence rule and the statute of frauds apply to those transactions.
A letter of intent is an expression from a buyer expressing the intent to purchase a property. Typically, in return, the seller will take the property off the market while the buyer contemplates making the purchase. The added benefit of a letter of intent to is take the property off the market while preliminary negotiations are taking place.
Options similarly provide the buyer with the option to purchase for a limited period of time. Buyers typically provide consideration (payment) for an option so the house is removed from the market while the buyer comtemplates the purchase.
Although letters of intent and options have the same result, letters of intent are more risky. If something goes wrong, a court may see a letter of intent as an enforceable contract, causing the buyer to make a purchase (or most likely provide damages) for a property they do not want.
GMH Associates, Inc. v. Prudential Realty Group
There was no enforceable oral contract. The oral discussions made between Prudential and GMH was not an offer which was later accepted by GMH. Even if it was an offer, the offer was rescinded before it was accepted. Instead, the discussions were made in continued negotiations, Prudential was asking GMH to make an offer.
Because no enforceable contract was made, no fraudulent representations could have been made that caused GMH to enter into a contract. Additionally, estoppel doesn’t work because the original letter of intent said that any party could back out at any time and the property was being sold as is.
Neddermeyer v. Neddermeyer
Exercise occurs when notice is provided, there is nothing in the law that requires the purchase be made within the time provided in the option. As such, he properly exercised the option in time.
Once the parties have reached an agreement, they execute a contract for sale and enter into the executory period. This is the period where the parties are most busy, as they perform their obligations under the contract before the closing date (the end of the contractual relationship).
Most states, if not every state, require this contract to satisfy the statute of frauds. That is, the contract must be put in writing and sufficiently describe the essential terms of the agreement (parties, price, intent to sell). This is because the statute of frauds applies to contracts for the sale of land.
Equitable Conversion and Allocation of Risk
When the contract for sale is executed, each party obtains an interest in the property. The seller retains legal title and possession of the property while the buyer has an equitable title. Along with this interest comes with certain rights, which could increase the risk of damages to the other party. Consequently, these risks are usually mitigated in the contract (e.g., provisions limiting the ability to transfer rights during the executory period).
Buyers also have an inherit amount of risk as it is assumed that they take on the risks of any negative consequences that occur during the executory period. However, with the development of insurance, this risk has been minimized. Typically the seller obtains insurance which money is put into a trust. Because the seller is double protected by this point (with the assumption that the risk will be allocated to the buyer plus the purchase of insurance), the insurance money can be used to benefit the buyer if anything were to occur.
However, most of the time, the purchase agreement is most likely going to allocate the risk to the seller.
Estate of Clark
Ms. Clark was afforded a life estate of the home of her mother in her will. However, that was only a present intent, and not actually a life estate. A real life estate occurred the following February. Before the life estate occurred, the home was sold to another family. Clark’s mother died shortly thereafter and Ms. Clark brought this suit, wishing to claim title to the home.
The court denies that there was a life estate created before the sale of the home. Consequently, the buyers had an interest in the home before Ms. Clark did. Because that interest transferred before the life estate was granted, Ms. Clark’s mother’s interest had also transferred. Therefore, Ms. Clark’s mother had not rights to grant a life estate at that time and Ms. Clark has no interest in the property.
Krotz v. Sattler
Krotz was selling land to Sattler. There were three neighboring parcels up sale. Two of them were sold quickly while the third was not. After execution of the contract and purchase of two of the three parcels, Sattler began working on the land. During this process, he went through the parcel that was not yet purchased. Krotz brought this action for trespass against Sattler. A directed verdict was afforded to Sattler’s benefit.
Sattler had equitable title of the land. This however, did not give him a possessory interest in the land and thus his entry was trespass. Despite his trespass, he is still entitled to a directed verdict because any damage to the land would go against the party with equitable title. Because Sattler had equitable title and damages would have been to his cost, the trespass does not change the outcome (no need to reward the seller twice). Thus, the trial court is affirmed.
Warranties and representations are statements about the property, which if false, would give the other party a cause of action.
Covenants are promises that the party will or won’t engage in certain actions about the property.
The contract conditions are the requirements of the party as they go through the executory period (e.g., subject to good title, inspections, financing, etc.).
Louisiana Real Estate Commission v. Butler
The Butler’s (buyers) put down a $12,500 downpayment on a home. They conditioned purchase of the home on whether they were able to get financing in the amount “to be determined” but at an interest rate of 8.5%. Unfortunately, the Butler’s were unable to get financing, requested the return of the downpayment but were denied. This lawsuit followed.
The Butler’s did not condition performance on the price of the property, only on the interest rate. There was no evidence that the Butler’s were unable to get a certain interest rate, only that they were unable to get financing. As such, they were in violation of the contract and the sellers are entitled to retain the downpayment.
The amount of property to be transferred, usually described by acres or square feet. This amount could also be described by boundary lines.
Perfect v. McAndrew
If the lot is purchased in gross, then the buyer takes the risk of the quantity of the property, unless there is proof that the seller used fraud, concealment, or misrepresentation.
The land was to be purchased in gross (as a whole) rather than a price per acre. This was shown by the ambiguous language of the contract supplemented by the actions of the parties. Nobody discussed the acreage until the survey. The mention of the acreage in the sale was merely to add to the description of the land. The lack of the phrase “more or less” is not deterministic of whether the property is purchased in gross or as a price per unit.
Safety, structural soundness, environmental condition of the land, condition of operating systems, disclosing inaccurate information, disclosing material defects, etc.
Duty to Disclose Material Defects
Material defects could be physical in nature, but recent cases have shown that stigma associated with the property could also lead to a material defect.
Van Camp v. Bradford
A patent defect in a property is something that is easily discoverable if a reasonable search of the property is conducted. On the other hand, a latent defect in a property is something that is not easily discoverable when a reasonable search is conducted. Usually, a seller has the duty to disclose latent defects.
According to Van Camp, a latent defect and a material misrepresentation about the defect could give rise to a cause of action.
Additionally, “as is” contracts only apply to the patent defects of the property unless there is fraud.
Today, in residential transactions, there is a disclosure form that the seller must fill out when selling the property. If the seller makes a misrepresentation on the form for defects that they know or should have known (do a reasonable inquiry), they can be liable for those representations.
For the rule stated above, it is very possible that a jury could find that an affirmative request for information was made and that Bradford did not provide a truthful statement. As this information was material (would have affected Van Camp’s willingness to purchase), there was a duty to disclose truthfully.
Types of Descriptions
There are three main types of descriptions. Essentially, a good description will describe one and only one parcel of land.
Metes and Bounds
The metes and bounds method describes the boundary lines of the parcel. This usually begins at the corner of the parcel (known as the point of beginning), and direction is made by reference to the true north and south lines of a compass (e.g., North 90 degrees west is straight west). For each direction, you measure how far the boundaries travel in that direction. Curves are based on circles, and irregular boundaries may be carved based on geographical features. To complete a sufficient legal description, the drawer needs to return to the point of beginning (called the close). In other words, this method looks at the measurements and angles of the boundaries to draw out a parcel of land.
Even the systems below could be described in metes and bounds, but the other methods tend to be shorter and are still proper legal descriptions.
Surveyors employ this system.
Government Survey System
This system was developed by Thomas Jefferson. What it does is essentially divides the United States into squares based on intersections of longitude (principal meridian P.M.: north-south) and latitude (baseline: east-west). The units are called townships and sections. A township is a 6×6 mile square with 36 sections inside (each a 1×1 mile square, or 640 acres). The description denotes the location of the township in reference to the baseline (known as the range) and the P.M. Sections can further be divided into subsections based on the description. There subsections can further be described by denoting where the parcel is located in relation to the center of the section.
An example of this description could be: NW 1/4, § 1, T.3N, R.2W, 5th P.M. This translates to: The Northwest quarter of the first section of the township 3 North and range 2 West of the 5th principal meridian.
Most farm land is described in this way.
This system is a description of the lots of land, as set out on subdivision maps as part of the public land records.
An example of this description would be: LOT 3 in [Subdivision] PLAT 4, in [City, County, State].
Most residential and commercial land is described in this way.
A survey is to look over the land (both physical and written) to ensure that the boundaries are correctly described. Most of this is for legal purposes, to ensure that the court knows who owns what. There are several reasons why to have a survey conducted:
- To show the existence of the property as legally described
- Determine the relationship between adjoining parcels: who owns what and make sure that there are no gaps
- To show any discrepancies between the deed and the physical property
- Determine whether fences and other property improvements are in the right location
- To discover unrecorded easements
- Understand how water usage or changes may affect boundary lines
Adequacy of the Description
The legal description of the property must satisfy the statute of frauds to be valid. However, the question is just how in depth the description needs to be for the deed, the purchase agreement, or other documentation. This sufficiency question is determined by the courts in each jurisdiction. But it is always better to be safe than sorry. Attorneys should error on the side of being more descriptive rather than generalized.
TR-One, Inc. v. Lazz Development Co.
The parties entered into a contract which Lazz Development Co. backed out of. When the plaintiff filed the lawsuit, the defendant sought summary judgement, arguing the description was too general causing the contract to be void. Below is the description:
Approximately 48 acres of vacant land located at 89 Mount Tom Road, Pawling, New York.
The specific plot of land was to be determined later. The court said that it was impossible to determine with any certainty which parcel of land was involved in the contract. Consequently, the statute of frauds was not satisfied and summary judgment was merited.
Walters v. Tucker
When there is no ambiguity in the deed, stick to what the deed says.
The defendant argues that the ambiguity comes from the application, and the deed should be dually interpreted from the words and how the ground functions. However, the court refuses to adopt that approach. Instead, the deed is clear, the Eastern border of Lot 13 is clear, making it a simple determination to know where the Western border should be (50 feet West of the Eastern border).
McGhee v. Young
The monuments hold more authority than descriptions in the deed.
Most of the time in the legal world, paper controls and physical aspects need to conform to the physical reality. However, that is not the case here. It is too impractical to request everyone to alter their physical monuments to line up with a paper description, especially when they have been relying on those lines for years. Thus, physical monuments in the land will trump over descriptions in the deed.
Marketable Title and Deeds
Title Search Process
Title search begins by knowing who has owned the property throughout history. This is called the chain of title.
Types of Recording Acts
Recording a deed doesn’t make it valid, it just gives future purchasers notice of who owns the property. There are three different types of recording acts.
“The first to record wins.” Only Delaware, Louisiana, and North Carolina have pure race statutes.
A conveys to B and C. C records first, C wins.
“The last bona fide purchaser wins.” A bona bide purchaser is a subsequent buyer who takes the property without notice of another party’s interest (because the previous purchase was not recorded).
A conveys to B and then to C (both bona fide purchasers). B records. C records. C will win.
Notice can be found through actual notice, constructive notice (regardless of actual notice, purchaser is deemed to have been notified—typically through a recording), or inquiry notice (should have asked and the facts would have readily presented themselves).
“The first bona fide purchaser to record wins.” So to win, a purchaser must pay value, without notice of prior claims, and record first.
A conveys to B and then to C (both bona fide purchasers). B records. C records. B will win.
Bona Fide Purchasers
If a property is properly recorded, any potential purchaser has constructive notice of those interests.
Pelfresne v. Village of Williams Bay
A village sued Schiessle saying the property was unsafe and sought an order to raze (tear down the buildings on the property), notice was provided that legal action was pending on the property. Schiessle sold the property to two others who were added onto the litigation. Based on a technicality, the case was dismissed, but promptly refiled. However, the Village failed to file a notice that litigation was pending. The two others sold the property to another. Then the Village obtained the raze order and a monetary judgment, but failed to record the order on the property. At this point, the third party sold to Pelfresne (the nephew of Schiessle).
The defendant may have had actual notice because he was the nephew of Schiessle, but the facts are not present. Further, there is no constructive notice because the raze order was missing from the proper location within the records. However, he may have been on inquiry notice because red flags would have been raised because of the situation—the judgment against several owners of the land and Pelfresne’s relationship to Schiessle.
Chergosky v. Crosstown Bell, Inc.
The rule is that if you acquire a property from a bona fide purchaser, then a subsequent purchaser will also be a bona fide purchaser (even if they had knowledge of the transactions).
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.