Introduction. Regardless of how active (or inactive) the market is, sellers’ brokers should always be on the lookout for “red flags.” These are the often harmless-looking provisions that, if ignored, can later come back and bite sellers. Here are a few. Note that this article refers to the 2022 OREF Sale Agreement, so section and line numbers may be different today):

The “Or Assigns” Provision. First, be aware that deep in the 2022 OREF Residential Sale Agreement (Sec.37(6)) is a single sentence that many Realtors® may be unfamiliar with. It states:

“…Buyer’s rights under this Agreement, or in the Property, are not assignable without the prior written consent of Seller.” (Emphasis added.)

Where does this issue come up? When the Sale Agreement offer includes the words “or assigns” after buyer(s) names in Section 1. There is a reasonable chance when requested by buyer, his/her broker dutifully does so without inquiring about the intent or purpose of the provision. There is also a reasonable chance the buyer’s broker may not be aware of Section 37(6) saying that seller’s consent is required.

May Seller Impose Conditions on the Assignment? So, if the offer is accepted with the “or assigns” language inserted, does the seller have any say in whether they will give or withhold consent? Clearly yes – assuming they are aware that Section 37(6) gives them that right.  It is my opinion that accepting an offer on the OREF Sale Agreement with the words “or assigns” inserted after the name of the buyer does not mean the buyer is free to assign the Sale Agreement without seller’s consent.

Below is a short summary of the variety of issues that arise from these two seemingly innocuous words unless fully vetted by sellers before accepting the offer. The main issue is whether seller can condition their consent upon other factors, such as:

  • Requiring that the assignee have the same or better financial credentials as the buyer-assignor?
  • Requiring that the buyer-assignor remain as a guarantor of the assignee’s performance?

There are at least two very different reasons for a buyer’s use of the “or assigns” language:

  • Buyer is merely acting as a middleman,[1] often with the idea of tying up the property and then “flipping” it, to use the vernacular sense. This business model is invariably coupled with the idea that the buyer intends to improve the property, either cosmetically or more substantively, and make a profit upon resale. While there should be no particular concern to the seller in this transaction (assuming the buyer is properly vetted), there should be – in my opinion – a heightened due diligence concern to third-party buyers who acquire such property. But that is the subject of another post.
  • As is seen in more commercial ventures, the buyer is using the “or assigns” language to acquire a property and then create a holding entity, such as an LLC, to go into title. The only issue of significance here is for sellers to make sure that the original buyer (who has presumably already been vetted for their financial bona fides) does not create the holding company that is controlled by a new member with whom seller is unacquainted. This condition can and should be included in any consent to the assignment.

Risk Management Tip. There are some individuals who believe they can, without a real estate license, purchase real property using this “or assigns” verbiage, and flip the property to a third-party, taking profit from the difference between the purchase and re-selling price. I do not recommend this business model, since (a) the Oregon Real Estate Agency (at least in the past) has taken the position that this practice violates the licensing law, and can require the flipper to “disgorge” their “illegal commission” because it was obtained without an Oregon license[2]; (b) the flip requires the assignee, often a consumer, to understand and appreciate what is occurring, since by the time of the assignment, all of the standard buyer due diligence contingencies could have expired; and (c) it will raise the ire of every broker in the neighborhood, and thus result in a stream of complaints to the Agency.

Conclusion. So, the take-away here is that when buyers add the “or assigns” text to their offers, seller and listing agent antennae should go up. While there may be perfectly legitimate reasons for this approach, it bears serious vetting by sellers before accepting the offer. Waiting until after acceptance could be too late.  ~ Phil 

©Copyright 2022 QUERIN LAW, LLC. Phillip C. Querin

_______________________________

[1] To the woke crowd, forgive me for the use of this allegedly misogynistic term. But according to Online Etymology Dictionary, here, the word “middleman” means, “…in the trading sense, ‘contractor, negotiator, broker,’ especially one who buys merchandise in bulk and sells it in smaller quantities to retailers or other traders,” 1795, from middle (adj.) + man (n.).” Accordingly, I have deferred to 200+ years of linguistic consensus saying it’s OK for me to use this word in mixed company. Whew!

[2] If you doubt the Agency’s authority to do this, take a close look at the list of activities for which Oregon requires a real estate license before earning a commission (ORS 696.010 (17), then consider ORS 696.040, which provides that “(o)ne act or transaction of professional real estate activity is sufficient to constitute engaging in professional real estate activity, within the meaning of this chapter.”

Introduction. This is a continuation of Part One, which addressed the printed contingencies found in the 2022 OREF Residential Real Estate Sale Agreement. (References to section and line numbers may be different today.)

Part One already covered:

  • Sections 5.1 (Financing Contingencies) and 5.2 (Failure of Financing Contingencies);
  • Section 6. (Seller-Carried Financing); and
  • Section 9 (Title Insurance).

As a reminder, a contingency is an event that must occur (or not occur)[1] for the transaction to become binding. All printed contingencies in the Sale Agreement are for the buyer’s benefit. There may be other contingencies in the transaction, such as the seller finding a replacement home, but they would be added by Addendum.[2]

Section 11.1 (Private Wells). This section asks: Does the Property include a well that supplies or is intended to supply domestic water for household use? [  ] Yes [  ]No. If yes, Buyer has attached OREF 082 Private Well Addendum to this Agreement.”

For buyers who have never owned a property serviced by a well, this contingency demands caution. Contact the Water Resources Department for information: https://www.oregon.gov/owrd/pages/index.aspx.

Even for experienced buyers, caution must be exercised. The seller’s knowledge and opinions are important, but expert verification is critical. The Addendum asks about well logs, well reports, and other information. If available, an expert should carefully review them. If there are no such logs or reports, ask why.

Buyers should familiarize themselves with the experiences of nearby neighbors who are also on wells. Are there any known problems? How much does it cost to drill a new well in the area? Are there any geologic issues that are problematic? What about water purity and flow? Has the seller complained about any well issues in the past?

Well testing is critical. The Well Addendum provides that Seller, at Seller’s expense, is to have the well tested for arsenic, nitrates and total coliform bacteria and to submit the results to the Oregon Health Authority and buyer. However, unless there is a transfer of title, well testing is not required.

Areas impacted by recent wildfires could contain arsenic, nitrate, bacteria, lead, and, possibly benzene, toluene, ethylbenzene, and xylenes (BTEX). However, these are “extra” tests and at buyer’s cost.

Well flow testing is at buyer’s expense. It should never be waived.

Buyer’s right to terminate in the Well Addendum is slightly different from the professional inspection provision in the Sale Agreement, discussed above. In the latter, there is an immediate right to “unconditionally disapprove” of the home inspector’s report. But in the Well Addendum, after release of the test results, there is a “negotiation period” for the parties to attempt to reach agreement on the nature, cost and financial responsibility for remedying any “substantial deficiencies” in the system. However, in the end, buyer is not obligated to reach agreement on a solution and may terminate the transaction and obtain a refund of their earnest money deposit.

Risk Management Tip. Well water problems discovered after closing can be costly to buyers – and their real estate agents who may be brought into the dispute. For brokers who are new to the business or unfamiliar with well water issues, it is critical to partner with another broker with this expertise. And regardless, the buyer should always secure an experienced professional to evaluate the system. Brokers should resist the temptation to offer their opinions about a well, the system, or quality and flow of drinking water – regardless of their familiarity with the seller, well water in general, or their experience. The minute an opinion is expressed, it makes you an expert. The Sale Agreement goes to great lengths in saying Realtors® are not experts –  allow that disclaimer to protect you!

Section 11.2 (Septic/Onsite Sewage System). This too is an important contingency for buyers unfamiliar with these systems. If the system is shared, buyer should have an expert review the terms of the sharing agreement. They can vary in terms and clarity. Buyers should find out if there have been any problems in cost sharing. The Oregon DEQ regulates residential septic systems. See link here.

The protocols in the Septic Addendum are similar to those for well water. But interestingly, contrary to the Well Addendum, there is no “negotiation period” after the test results are shared. The “unconditional termination” provision of the Septic Addendum is similar to the one found in the professional inspection section of the Sale Agreement.

Risk Management Tip. Brokers should always remember that when dealing with septic systems, there are two issues: (a) the tank; and, (b) the drain field. In some cases, the tank could be perfectly fine, but the drain field shot – or vice versa.

And as with the Well Water Addendum, brokers with limited familiarity with these systems should partner with a more experienced person. And as with well water problems discovered after closing, the cost to remedy a failing tank or drain field can be significant. As the dollars increase, buyers are more inclined to look around for someone – such as a real estate agent with E&O insurance – to share the cost. Let the expert do the talking and stay in the background when dealing with well water and septic systems.

Section 12. (Lead Based Paint Contingency Period). As most Realtors® know, if a residential property is being sold that was constructed before 1978, then on, or promptly after, the Effective Date of the Sale Agreement, the seller is required to deliver to buyer OREF 021 Lead-Based Paint Disclosure Addendum together with the EPA Pamphlet entitled “Protect Your Family From Lead in Your Home.”

Unless waived by Buyer in the Disclosure Addendum, buyer has ten (10) calendar days (or another mutually agreed on period) to (a) conduct a lead-based paint assessment or inspection and (b) unconditionally cancel the transaction by written notice to the seller at any time before midnight on the last day of the 10-day period. If timely made, the transaction is then terminated, and buyer has the right to recover their earnest money deposit.

Seems pretty straightforward, right? Simple enough, yes? This is what the 2022 Sale Agreement says today. This is not what it used to say for several years prior to 2022. The problem today is this: Under the terms of the 2022 Sale Agreement, buyer’s right of cancellation is unlimited, so long as it is timely made – it no longer requires any inspection or evaluation.

For example, say the buyers found a beautiful old pre-1978 home in a beautiful old neighborhood. They loved the home but had not made up their minds whether they could afford the repairs and upkeep. But it was sure to go quickly – there were already multiple offers. Rather than getting repair bids and putting a sharp pencil to the numbers, they immediately made an all-cash offer, paid $100,000 earnest money deposit, and waived their property inspection contingency. The good news for the buyers was that their offer was accepted. The bad news for the sellers is that they accepted the offer without requiring their buyers to waive the LBP Contingency. So now, buyers have tied up the property for a “free peek” and have time to decide whether to remain in the transaction with little or no risk. They may cancel the transaction within the 10-calendar day period for no reason, without inspecting or evaluating the property for LBP, and obtain a full refund of their $100,000 deposit!

Why? Because the LBP Contingency no longer provides that buyer’s right of cancellation may occur only if a certified LBP inspector identifies the existence of LBP or LBP Hazards in the property.

Risk Management Tip. First, consider the rationale for buyers having LBP inspections. If the home is pre-1978 the chance of it containing LBP somewhere is pretty high since lead was found in all paint back then. The question today isn’t really if there is LBP, but whether it has been “incapsulated” – i.e., painted over with more recent non-LBP in the years since 1978 i.e., during the last 44 years.

“Lead based paint hazards” are those you can see, include peeling, chipping, chalking, cracking, damaged, or damp LBP. Certainly, these conditions bear evaluation, especially if the buyers have small children. But most buyers, assuming they are familiar with LBP risks to their kids, would likely recognize during one or more walk-throughs whether those conditions existed, and would hire remediation experts immediately after closing and before taking possession.

The Take-Away. Listing agents should view with caution buyers’ use of the LBP Contingency as it currently reads. It can – and has – been used as a ruse to tie up a property with very little risk of losing the earnest money deposit.  Is it a ruse, or is it based on a legitimate good faith concern? I submit that if its use arises from a legitimate good faith concern, then listing agents suggest their seller require that the LBP Contingency include an inspection and report by a professional.  But if there is a suspicion the purchasers are merely using the LBP Contingency to buy time, suggest the seller require that the purchasers waive it.

One last comment. The reason the Seller Property Disclosure Section 13 of the Sale Agreement is not discussed as a “contingency” in these two articles is because it was not created by OREF, but by Oregon statute. It really is not a “contingency” since it does not depend on any third-party events, such as unsatisfactory inspections, LBP, title defect, or sewer and well water reports.

All rights and duties relating to the Seller Property Disclosure Statement are found at ORS 105.464 et seq. It was well-intended legislation that serves as a cautionary tale about how things can go awry when forms drafting is relegated to disparate legislative committees and interest groups with differing agendas, skills, and attention spans. ~Phil

 ©Copyright 2022 QUERIN LAW, LLC. Phillip C. Querin

________________________

[1] I say “not occur” because the professional inspection contingency is tied to buyer not rejecting the report. Same for the title contingency. Silence is consent.

2 Note to sellers: This contingency can be risky if not carefully drafted to assure that the contingent event is not satisfied or waived too early. Merely “entering into an agreement to purchase a replacement home” can be premature. The inspection should be completed, and financing pre-approval obtained – at minimum.

Introduction. As most Oregon Realtors® know, the OREF Sale Agreement provides that, subject to certain exclusions, all disputes that cannot be otherwise amicably resolved must be first mediated. If that isn’t successful, recourse is through mandatory arbitration. The filing of legal actions in court is not permitted except in cases seeking “provisional process” e.g., for injunctions, restraining orders, and similar matters requesting immediate and extraordinary relief.

The Portland Metropolitan Association of Realtors® (“PMAR”) has its own mandatory mediation process, where disputes involving transactions handled by one or more PMAR Realtors® must first be filed. If mediation is unsuccessful, the only other venue for resolution is through Arbitration Service of Portland, Inc (“ASP”). ASP administers all other non-PMAR mediations for disputes arising under the Sale Agreement.

In some of these seller-buyer disputes, one or both Realtors® may be named because a claimant feels their broker, or the other broker, or both brokers, engaged or participated in activity that caused them damage.

The Sale Agreement’s mediation/arbitration dispute resolution process involving Realtors® is not available to resolve claims for violation of the NAR Code of Ethics. Those are handled at the local Realtor® association level. Similarly, claims against brokers for violation of Oregon’s licensing laws and rules (ORS Chapter 696 and OAR 863) must be filed through the Oregon Real Estate Agency

The 2021 ASP Statistics. Annually, ASP provides PMAR with its arbitration statistics to assist in helping the industry better understand the type of property disputes that end up in arbitration. What follow is a summary of those disputes and Realtor® tips to avoid them.

Seller Misrepresentation Claims. Caveat: This discussion relates only to the topics, not the outcomes. Having several of these claims end up in arbitration does not mean they all resulted in awards for the buyer against the seller.

Unquestionably, over the years, this has been the largest source of claims ending up in arbitration. Moreover, they often include the seller’s broker. This joinder of parties, i.e., naming the seller and their listing agent as co-respondents, should not be a surprise. Oftentimes, it is the listing agent to whom the seller confides, and (unfortunately) the listing agent wittingly or unwittingly, acquires information that provides the basis for a buyer’s claim against that broker.

For example, in completing the Sellers Property Disclosure Statement (“Disclosure Form” or “Form”), sellers turn to their agent to better understand how to answer particular questions: Below are some examples of Disclosure Form questions[1] – coupled with a typical inquiry the seller might have of their broker before finalizing the Form:

  •  Are there problems with settling, soil, standing water or drainage on the property or in the immediate area? “I had some problems last year, but they all got resolved. Do I need to answer “Yes”?
  • Are there any pending or proposed special assessments? “There have been some recent owner complaints to the HOA about ceiling leaks in their units – but not mine. Contractors are looking at things right now. So far, there have been no assessments proposed, nor assessments made. How should I answer?”
  • Are there any encroachments, boundary agreements, boundary disputes, or boundary changes? “My neighbor told me he thought my fence was on his land, but he never asked me to move it. We have no dispute. Do I need to answer ‘Yes’”?
  • Are there any moisture problems, areas of water penetration, mildew or moisture conditions (especially in the basement)? There are some leaks in the basement during the winter months, but they all go away when the rains stop. Do I have to answer “Yes” even though they are not really a ‘problem’ and are just temporary?”

The “Situational Ethics” Problem. Each of the above property disclosure questions might be answered differently if asked of a seller versus asking the prospective buyer. The seller who does not disclose (or “under-discloses”) may believe they are answering appropriately by strictly interpreting the scope of the question subjectively. E.g., “Yes there was a problem, but it was repaired”; “No, there is no ‘dispute’“; “No, it has not been a problem.”

But how would the seller respond to the following: “If you were a buyer wouldn’t you want to know these things – i.e., letting the buyer decide whether the issue is important in their purchasing decision?”

The minute the listing agent becomes involved in salving the seller’s conscious for not disclosing an issue because the framing of the question didn’t strictly require it, the agent has, figuratively speaking, left their “fingerprints” on the Disclosure Form, which provides a basis for including them in the claim.

The Take-Away. Buyer claims of nondisclosure against sellers and their brokers are primarily – but not exclusively – the result of information the seller could have disclosed but elected not to.

To be fair, however, some fault can be placed on the spectacularly poor and inconsistent drafting of the Disclosure Form – keeping in mind that the text is a product of legislative drafting, not OREF drafting. Time does not permit examples, but there are many.[2]

Also, sometimes seller nondisclosure claims can be traced back to other, less culpable, factors: E.g., (a) Information that was beyond the scope of the Form’s questions; (b) The seller made a good faith error;[3] (c) The buyer already knew or should have known of the defective condition; or (d) Any number of other reasons unrelated to an effort to intentionally conceal information from the buyer.

For listing agents and their sellers, there is One Rule: “If in doubt, disclose.” There is no such thing as saying too much. Or to put a finer point on it, sellers should make the same level of disclosure in answering the form as they would want if they were buyers reading the form. This approach is also known as The Golden Rule. “Disclose, Disclose, Disclose.” Let the buyer decide what is important to them.

Specific Performance Claims. The second largest category in ASP claims relate to buyers asking the arbitrator to require the seller to complete the transaction. This is called “specific performance” which is really the name of the remedy sought for the seller’s breach of contract in refusing to close the transaction.

Since money damages are not really sufficient to fully compensate a prospective buyer, specific performance is the preferred remedy – especially in times of limited inventory when a suitable replacement property is not available. These claims do not normally include the listing broker.

In many specific performance cases, though not all, the reason a seller declines to close the transaction is because they believe they underpriced the property, and/or have a back-up buyer for a better price. Occasionally, sellers decline to sell because they cannot find a replacement home and refuse to close under the misguided belief they can unwind their first transaction.[4]

If the Sale Agreement is clear on its face, the buyer has complied with its terms, and is ready, willing and able to perform, there is a potential claim for specific performance against the seller.

Earnest Money Disputes. The third largest area of contested cases involve earnest money disputes. These situations arise because either the seller or buyer believe the other side breached the pre-closing terms of the Sale Agreement. Examples include the failure to timely deposit (or provide proof of ) funds; the failure to timely secure financing; and untimely rejection of the property inspection report. There are many others.

Although these claims do not normally include a party’s broker, there are things agents can do to reduce such disputes: (a) Know all deadlines; (b) Discuss them with the buyer and seller; and (c) Make sure both agents agree on the same deadline dates.

Why Are There No Seller vs. Buyer Damage Claims In Arbitration? The answer is found in the OREF Sale Agreement – and almost all other contracts for the sale of real property. The earnest money deposited by buyer into escrow is expressly intended to serve as the seller’s agreed-upon “damages” in the event buyer fails to perform. This pre-agreed sum is known as “liquidated damages” i.e., it is stipulated to be the amount the parties have agreed upon in advance, as representing seller’s damages caused by buyer’s default.

This can be a two-edged sword. If the buyer breaches early in the transaction, the earnest money deposit may far exceed seller’s actual damages (assuming seller can quickly resell the property); but if the buyer breaches late in the transaction and the seller had moved out of the property and relocated elsewhere, their actual damages may far exceed the stipulated damages represented by the deposit. In either case, since the sum has been agreed to in advance, with the proper recitals in the Sale Agreement it is the maximum amount seller may recover for buyer’s nonperformance – nothing more.

ConclusionAre the number of disputes that end up in mediation and arbitration going up, down, or staying the same? That question cannot be answered as it is framed. The reason is that, there should be an inverse relationship between the numbers in mediation and arbitration. That is, the more mediations there are, the fewer arbitrations there should be. To put it another way, mediations, if properly conducted, should have a prophylactic or lessening effect on the number of arbitrations. That has been the case ever since the mandatory mediation clause was instituted in the OREF Sale Agreement circa 1997.[5]

~ Phil

©Copyright 2022 QUERIN LAW, LLC. Phillip C. Querin

______________________________

[1] There are too many to list here. The failure to include them is not to minimize their importance.

[2] Drafting of legislation is often the product of committees composed of stakeholders. How many iterations the final product went through  – how many drafters reviewed each one – or how many last-minute changes were made with little or no oversight, is unknown. Clearly, the Disclosure Form contains inconsistent and conflated language. [See discussion at: https://q-law.com/oregon-sellers-property-disclosure-conundrum/]

[3] To be clear, the statute, ORS 105.464, provides that the seller’s answers are based upon their “actual knowledge of the property at the time of disclosure.” Technically, if that knowledge is the result of a good faith error, it cannot (or should not) form the basis of a claim against seller. The representations in the Form are not warranties.

[4] In these situations, sellers should include a well-drafted contingency making the sale transaction subject to the purchase and closing of the replacement property. However, this requires careful drafting; some buyers may not want to wait for the seller’s purchase to close before allowing the contingency to expire. Sellers should be encouraged to consult with qualified legal counsel before entertaining offers.

[5] The reason is because for over 20 years, the mediation clause in the OREF Sale Agreement has contained a provision that if a party failed or refused to mediate first, they could not recover attorney fees later in arbitration, even if they prevailed. This became a significant incentive for recalcitrant parties to first try to settle their disputes in mediation. It worked.

Introduction. For many years before Covid, when Portland Metropolitan Association of Realtors® (“PMAR”) had live New Member Orientation (“NMO”) seminars, I spoke about real estate basics; the Sale Agreement, contingencies, financing, professional inspections, etc.

One of the topics of discussion included title insurance. I would routinely ask the new licensees for a show of hands of those who looked over the preliminary title reports (“PTR”) when they came in after an escrow was opened. Only a very few hands were ever raised.

To be clear, it is my opinion that review of the PTR is not a standard of practice or standard of care for Oregon Realtors®. They are not expected to be title experts. In other words, a broker’s failure to review the PTR is not, standing alone, client negligence or a breach of fiduciary duty.

However, if they do review the PTR, agents should never render an opinion to clients about whether title is “clear” – nor should they opine about the legal effect of the Special Exceptions to title appearing the PTRs.

If all this is true, then do Realtors® need to concern themselves with title insurance at all? Can/should they just ignore the issue entirely during their transactions? The answer is an emphatic “No.” Title insurance is included in all broker pre-licensing training for a reason.

It is an integral part of every real estate transaction, although the role title insurance plays in the pre- and post-closing process is not widely understood by sellers, buyers, Realtors® and attorneys.

The real experts are the title officers who examine the title and sign the PTRs. However, they cannot serve as the parties’ experts or attorneys. Rather, the title officer’s role is to review the public record information on the subject property that is provided by their title plant,  evaluate it, and  make sure it is accurately disclosed in the PTR. When appropriate, title officers are available to answer questions about the listed Special Exceptions, as explained below.

In the standard property transaction, the Sale Agreement gives buyers a fixed number of business days to accept or reject the information in the PTR. This contingency is one of several available to buyers after their offer has been accepted. Upon timely objection to title, the buyer is entitled to terminate the transaction and receive a full refund of the earnest money deposit.[1]

The Conundrum. But here’s the rub: If most buyers do not understand the information disclosed in the PTR, and their brokers are equally unclear, what purpose is served? How is the buyer to know whether to opt-out of the transaction (i.e., exercise the title contingency), or remain in the transaction (e.g., waive the title contingency)? Calling the title company to get direction on how to proceed will likely result in the response, “We cannot issue legal advice” – which is correct and appropriate.

The good news is that pursuant to the OREF Sale Agreement, a buyer’s failure to timely object to the information in the PTR during the contingency period does not mean the seller is free to convey unmarketable title to the buyer.[2] However, this does not mean that certain exceptions to title, such as recorded CC&Rs or easements, are meaningless and don’t need to be reviewed during the allotted contingency period. I will explain below.

 Is Title Insurance Truly “Insurance”? To answer this, we first need to define the concept of “insurance.” When we think of fire insurance or auto or health insurance, we think of a policy that provides benefits, usually compensation, in the event of an unexpected occurrence. This loss, such as a fire, collision, or illness, is the “risk” that is insured against. No one, the insurer or insured, actually knows if or when it will occur.

But protection against unknown risks cannot be strictly said of title insurance. The reason is because title insurance is not really based upon the standard concept of “risk” as described in other insurance policies.

In standard insurance, the company bases its evaluation of risk, and ultimately its cost to the consumer, upon actuarial or statistical evaluation. The company, knowing the odds, charges a premium designed to compensate it for taking the risk. But as discussed below, with title insurance, the company is permitted, in the vernacular – to hedge its bets. Some may disagree with this characterization. Regardless of how the issue is framed, typical loss and loss-adjustment expense ratios are 4% to 13% for title insurers, compared with the 65% to 85% in the property/casualty industry.[3]

How Title Companies Hedge Against Risk. When escrow is opened, the title company closely examines the public record to determine if there are any encumbrances (aka “defects,” or “clouds”) against the seller’s title. These encumbrances normally take the form of:

  • Financial matters, such as mortgages (i.e., “trust deeds” in Oregon), judgments, taxes, assessments, or other charges against the property that must be paid to be removed from title; or
  • Nonfinancial matters, such as easements, deed restrictions, or other limitations on the use of the property that typically cannot be removed.

Both matters are identified as “Special Exceptions” in the PTR and are not covered by the company’s policy of title insurance. They are excluded (i.e., “excepted”) from coverage. This means that if the insured buyer closes their purchase and goes into title, these encumbrances do not go away – they impact the title going forward.

Then What Services Do Title Companies Provide? If after finding and identifying the Special Exceptions, the company excludes them from insurance coverage, what risk are they undertaking? For what are they being paid? They just eliminated all the risks!

Title companies provide several important services to buyers. The main one is examining the chain of title and disclosing all of the matters of record affecting of the subject property.

Examination of Title. As noted, they examine the record title and disclose the information to buyers in the PTR. This includes the (a) names of the owners of fee title (hopefully the sellers whose names appear in the Sale Agreement) and all the recorded matters affecting title. This information has value to buyers, since there is no other efficient or cost-effective way for them to find out if their seller’s title is marketable, i.e., it is free and clear of objectionable liens and encumbrances, and therefore capable of being legally conveyed.

Once this information is disclosed, it is up to the buyer to decide how to proceed. If the Special Exception is financial, such as a recorded trust deed or judgment, the buyer would normally demand that the encumbrance be paid off before closing, thus removing it as a charge against the property. If it is non-financial, such as an easement or deed restrictions (“CC&Rs”),[4] the buyer should review them and decide whether they are acceptable.

 So, When Does The Title Company Ever Pay a Claim? Question: If the company reviews record title and then excludes from coverage every risk arising from that record, why would any claims ever be filed?

Answer: Because errors can occur during the examination of title. If the company misses a recorded encumbrance, such as a $25,000 judgment lien, it does not show up as a Special Exception on the buyer’s title policyi.e., it remains on the buyer’s title after closing. Thus, the buyer would have a “claim” against the title company for the error, who must then do what is necessary to remove it from title. Normally, that would mean paying off the judgment creditor and seeing that a Satisfaction of Judgment is recorded. Voila’! The buyer’s title is free of the encumbrance.

If the title company misses a non-financial encumbrance, say recorded CC&Rs, the buyer’s “claim” is more problematic, since the insured would have to establish that because of the company’s oversight, their title suffered a loss in value due to being encumbered by the recorded (but missed) CC&Rs. But most CC&Rs do not negatively impact the marketability of title, so it is hard to say any monetary loss is suffered by the owner. Accordingly, it is these nonfinancial encumbrances of record that need to be reviewed by buyers during the title contingency period. They could cause problems to certain buyers since they will remain on title if not objected to within the contingency period. An example might be a deed restriction against operating a day care facility on site or conducting certain other types of businesses.

Remember, the Sale Agreement is quite clear that the failure to timely object to a Special Exception during the contingency period constitutes a waiver of the right to do so later (subject only to the marketable title exception). Silence is consent.

However, there are some non-financial encumbrances that if erroneously missed in the title examination and therefore not listed in the Special Exceptions (such as a non-probated estate a hundred years ago), could result in a claim against the title company because there are heirs of the estate who might still have an unreleased interest in the property. This type of error would require the title company, at its cost, to locate the living heirs to obtain deeds (e.g., quitclaim deeds) from them, releasing their interest in the new buyer’s property.

ConclusionThe take-away is that if it has done its job correctly, the title company will have accurately reviewed and disclosed all public record encumbrances (financial and non-financial) in the PTR and subsequent title insurance policy as Special Exceptions. Ergo, there are no known persons with any interest in the property being conveyed – it is free and clear of objectionable liens and encumbrances.

But if it has not done its job correctly, it is likely due to the examiner’s failure to “catch” some defect in the record title and disclose it as a Special Exception.

Thus, loosely speaking, title companies are really just warranting their work; figuratively speaking, they tell their insureds that “What we’ve disclosed to you in the PTR and final policy as ‘Special Exceptions’ represent everything on the public record affecting your title.” If they are correct, their insured has been fully informed and there are no claims. If they are wrong, i.e., some recorded encumbrance has not been listed as a Special Exception and it was not caught before closing. In those instances, the company must deal with their insured’s claim under the terms of the policy.

 Two things of note:

  • There are also “Standard Exceptions” in the PTR and final title policy. If a loss arises from an event that falls within one of the Standard Exceptions, there will also be no title insurance coverage.[5] However, in most instances, these exceptions from coverage can be mitigated in advance by specific due diligence precautions taken by buyers. This is a topic for another day.
  • Additionally, there are some isolated circumstances that title companies expressly cover in their policies, such as forgery, impersonation, lack of capacity, failure of a necessary party to join in a deed, and other events which cannot easily be discerned from the record title. These can be characterized as “risks.”

Confusing? Yes. The interesting question is, given the complexity of title coverage, and the fact that most buyers in Oregon do not hire qualified attorneys for assistance, why so few title problems occur?[6] To a degree, this is attributable to good escrow officers, who can proactively spot problems, and good title officers, who are accessible to the parties – and their attorneys – when questions arise.

For a more in-depth discussion of these and other title issues, see Title Insurance 101, here, and Title Insurance 201, here~ Phil

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[1] See Section 9 of the OREF 2021 Sale Agreement.

[2] See Lines 154-155 of the OREF 2021 Sale Agreement. “However, Buyer’s failure to timely object shall not      relieve Seller of the duty to convey marketable title to the Property pursuant to Section 28 (Deed), below.”

[3] Rating Title Insurance Companies, AM Best, 2016. See link, here.

[4] It is these easements and use restrictions that buyers need to review within the title review period to make sure they do not contain any unacceptable provisions. They will not go away after closing.

[5] E.g. governmental regulations; title defects known to the insured; matters that a correct survey would disclose; unrecorded liens; parties in possession.

[6] It is important to know that most western states rely upon title insurance companies to examine title, while in the Midwest and east coast, lawyers check title. For this reason, the use of lawyers in residential real estate transactions is not commonplace where title insurance companies do the title examination such as Oregon and Washington.

Discussion. The short answer is “Yes.” But the longer answer requires more explanation. First, a caveat:  By “review” I do not mean by the listing agent for the purpose of substantively changing a seller’s answers. Rather, by “review” I mean “review for completeness.” Oregon’s property disclosure statute, ORS 105.464, instructs sellers to:

“Please complete the following form. Do not leave any spaces blank.” (Emphasis added.)

Accordingly, it is my belief that brokers for both sellers and buyers should routinely review disclosure forms to confirm they are complete in two respects:

  • To make sure there are no unanswered questions. The choices are “Yes,” “No,” “Unknown,” or “Not Applicable;” and
  • To make sure that if an asterisk (*) appears next to a question, the requisite written explanation is attached.

The disclosure statutes provide that buyers have five business days[1] after their seller’s delivery of the form to “revoke” (i.e., withdraw) their offer, based upon a “disapproval” of the seller’s information provided in the form. The buyer’s notice of revocation must be written and delivered, but there is no required wording. “I disapprove” will suffice, if timely made.

Questions:

  • What if one or more questions are left unanswered or the required explanation is not attached?
  • Has the form been “completed”?
  • And if not completed, does the buyer’s five-business day period for revocation still commence on delivery?
  • If the revocation period does not commence, does that mean buyer’s to withdraw from the transaction runs all the way to closing?[2] See, ORS 105.475(3).

The statutes are silent on these questions.

This discussion is more than hypothetical. I have seen critical questions left unanswered and unexplained; sometimes unintentionally, and other times, likely on purpose. (I will defer for another day the discussion on whether fraud by omission, e.g., silence, is any less venal than fraud by an outright misrepresentation.)

Review By Listing Agents. Most sellers and listing agents would agree that expiration of the buyer’s right of revocation is an important event. Why? Because revocation requires no explanation; it is easy – like buyer’s remorse. Secondly, only after the revocation period expires can the parties get down to the serious business of focusing on due diligence issues.

Accordingly, anything that can prolong the five-business day period, such as delivery of an incomplete disclosure form that gets returned, is a disservice to the seller. For this reason, listing agents should review their client’s disclosure form for completeness before delivery to the buyer or buyer’s agent. The failure to catch an incomplete form before delivery can result in unnecessary delay.

Review By Buyer Agents. Conversely, buyer agents should review the disclosure form for completeness immediately upon receipt. If there are critical questions left blank, or written explanations that have not been attached, the disclosure form should be promptly returned. If that occurs, it should be made clear to the listing agent that the five-business day right of revocation will not commence until the “completed” form is delivered.

However, for buyer agents another critical function exists. In some cases, a seller may answer a question in the affirmative, e.g., that the roof has leaked, or there was water in the basement, but the buyer fails to follow up. Equally problematic is when a seller responds “Unknown” to questions that demand further inquiry. In both instances, buyer agents should encourage their clients to alert the inspector to these issues. This is another reason for review – to be a second set of eyes for the buyer; it is useful for developing a due diligence checklist. If necessary, the seller should be contacted for more details.

The Take-Away. Accordingly, both agents should, at the earliest possible time, review the seller property disclosure form for completeness. Not doing so creates a risk of unnecessarily prolonging the revocation period. Again, this is not to say listing agents should become involved in answering the questions, checking boxes, or authoring explanations. Those responsibilities belong exclusively to the seller. ~ Phil 

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[1] The statutory form found at ORS 105.464 is wrong. It should say “five business days.” The original legislation at Section 1, Chapter 547 of the 1993 Oregon Session Laws provided “five business days.”  Why this error has remained ignored and uncorrected for nearly 20 years is a mystery. We changed the OREF Disclosure form years ago to be consistent with ORS 105.475(1).

[2] This is not to suggest that a buyer could accept a disclosure form, realize it was incomplete, say nothing and retain the right to revoke all the way to closing. A buyer’s failure to act promptly under those circumstances would likely operate as a waiver or estoppel against them.

Introduction. Oregon’s property disclosure law was first created in the 1993 Legislative Session – nearly 30 years ago. This was back when the idea of sellers having to “disclose” any information about their homes was a foreign concept. Short of outright fraud, caveat emptor[1] was the rule of the day. Of course, if a seller intentionally misrepresented the condition of their property, it was actionable – but sellers were not then required to make any disclosures, thus leaving buyers to learn as much as they could about the property on their own, before making an offer.

In fact, the concept of “disclosure” was so foreign at the time, that the Oregon legislature gave sellers the right to select between it and “disclaimer”. Thus, residential sellers had a choice between using one of two forms: (a) They could either answer a series of statutory questions about the property (“Disclosure”), or (b) tell their buyer nothing (“Disclaimer”). To lawyers advising their seller-clients, this was a no-brainer – always disclaim.

Both forms permitted buyers a fixed period of time following delivery of the disclosure of disclaimer form to withdraw from the transaction (called the “right of revocation”). This will be examined more closely in Part Two.

It was not long before the Disclaimer option eventually disappeared. Today, the law provides that unless exempted (e.g., new construction sales; sales by court-appointees; foreclosure sales, etc.), all sellers of one-to-four family homes (including condominiums and townhomes) are required to give their buyers a Seller’s Property Disclosure Statement (“SPDS”).

Seller Property Disclosure Today. Fast-forwarding to today, we see that some things have not changed. Most of the questions in the SPDS remain the same; many are poorly worded and suggest that each section was drafted by a separate group, each relying upon their own specialty, such as plumbing, heating, cooling, electrical, land use, title, condominium, etc. There appears to have been no effort to follow uniform style and syntax. Inexplicably, after nearly three decades, most of these questions remain unchanged today.

  • Some require knowledge of the law: “Is the property being transferred an unlawfully established unit of land?”;
  • Others require land use knowledge: “Are there any governmental studies, designations, zoning overlays, surveys, or notices that would affect the property?
  • Some questions refer only to the time of the sale: “Are there any sewage system problems or needed repairs?” This question ignores past problems.
  • Others refer to conditions that could have occurred at any time over the duration of a seller’s ownership: “Has the roof leaked?”

And perhaps the most open-ended of questions comes out of the blue at the end of the form:

  • “Are there any other material defects affecting the property or its value that a prospective buyer should know about?”[2] Not only does this question ask how a defect affects the home’s value (while all other questions relate solely to its condition) it requires the seller to know what issues are important to each buyer – metaphoricaly, it asks sellers to become mind-readers.

I do not suggest these topics are unimportant – but believe that many questions are simply beyond the ability of most sellers to answer with certainty. I suspect that less than 20% of sellers can answer all the questions with any degree of confidence.

The only saving grace in the legislation is that it expressly provides that sellers’ answers are based only upon their “best knowledge”- they are not guarantees or warranties. Thus, being wrong is permissible; it does not automatically make a seller liable; liability may only attach if the buyer can establish (through clear and convincing evidence[3]) that their seller knew an answer was false.[4]

And since most real estate listing agents try to avoid having their fingerprints on the SPDS,[5] many balk at answering their clients’ questions seeking direction or interpretation. This leaves sellers on their own.

Lastly, the SPDS form and its enabling legislation contain one glaring 28-year-old error. While the language of the form dictated by ORS 105.464 states at the beginning and end of the document that buyers have “five days” from delivery of the disclosure statement to give notice of their intent to exercise their right of revocation, the text of ORS 105.475(1) says that right commences after “five business days” following delivery.

The 28-Year-Old Mystery. How is it that for over a quarter of a century the Oregon real estate industry has ignored the admitted sloppiness of a form it had a major hand in creating?

The oft-quoted meme used to explain this anomaly is that doing so would open up the form to other stakeholders and consumer advocates (e.g., environmental, zoning, fair housing, conservation, noise pollution, etc.) who would expand the list of required disclosures into an unwieldy amalgam of questions – akin to California’s approach to seller disclosure.

Based upon this rationale it’s a wonder the U.S. Constitution was ever amended. Perfect has become the enemy of good. ~ Phil

[To   be continued.]

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[1] “Buyer Beware”

[2] This is like asking a witness on the stand before stepping down: “Is there anything else you have not told the jury that they would want to know?”

[3] The burden of proof for fraud and misrepresentation.

[4] Liability can also attach if the seller “recklessly” made a statement without any basis. This is a more complicated analysis but can be a trap for the unwary seller.

[5] For fear of being brought into a buyer vs. seller claim and accused of having recommended the seller’s answer.

Below is an article I authored in early 2020. How times have changed!

In a recent Housingwire.com article (here) by Kathleen Howley, we learn that the current average 30-year mortgage interest rate of 3.24% is within one basis point[1] of its all-time low of 3.23%. According to article:

Fannie Mae projected last week the average this quarter would be 3.2%, followed by 3.1% in the third quarter and 3% in the fourth quarter.

Fannie Mae is forecasting an average of 2.9% for every quarter of 2021.

Continue reading “Interest Rate Retrospective!”

Introduction.  The term “specific performance” is not, as commonly believed, a form of legal action that may be brought for enforcement of a contract.  Rather, it is a remedy for a breach of contract claim because the underlying agreement has not been performed.

In other words, before reaching the issue of the remedy, a court or arbitrator must first conclude that the contract was breached.  If monetary damages for the breach can be awarded, there is no need to award specific performance.  For example, if a supplier promised to deliver me 25,000 widgets on July 1, but only delivered 20,000, the most appropriate damage would likely be to obtain a judgment against the supplier for my cost obtain another 5,000 widgets elsewhere. Continue reading “Specific Performance in Oregon Residential Real Estate Transactions”

These guidelines require the consent of third parties, e.g. sellers, buyers, tenants, buyer brokers, inspectors, appraisers, property managers, contractors, plumbers, and others involved in the home purchase/sale transaction.  Accordingly, they should be provided with a copy of these requirements. Any questions or concerns expressed should be directed to the Supervisor where appropriate.

Screening: All prospective visitors to the home should be screened in advance. Brokerages should create a screening process to be used uniformly for every visitor. See PMAR COVID-19 “Suggested Visitor Screening Questionnaire” below, for example. Continue reading “COVID Protocols For Showing Homes Listed For Sale”

Introduction.  Almost as soon as the COVID pandemic flared up, I began to receive calls asking whether the virus could constitute the basis for refusing to perform under a pending Sale Agreement.  One broker reported that the buyer wanted out of the contract because of “uncertainty”.

These are not altogether unreasonable reactions to performance; after all, we’ve never experienced anything like this pandemic before. However, over the years, comparable issues have arisen, the most obvious being wars, strikes, and natural disasters.  So let’s take a look at how the courts have dealt with these events in the past. Continue reading “Is COVID-19 a Defense to Breach of the Oregon Real Estate Sale Agreement?”