This week I’ll talk about the court’s ruling that the listing broker violated its fiduciary duties when it messed around with the escrow deposit.
Quick Take-Away
The important take away from this case for all real estate agents is that if you are holding a deposit as an escrow agent, don’t even think about messing with it even if there’s a legitimate dispute about your commission or other monies owed to you. It’s not your money! The best advice is to let the dispute run its course and continue holding the funds in escrow.
Dispute Between Listing Broker and Buyer
The facts of this case are a bit unusual. Listing Broker represented the seller in a purchase of residential property in Wayland, MA. Under the standard purchase and sale agreement, the buyer posted a $92,500 escrow deposit which Listing Broker held as an escrow agent. The same buyer apparently used Listing Broker on another transaction and owed it nearly $35,000 in fees.
The buyer lost its financing and defaulted on the contract, thereby forfeiting the $92,500 deposit. (I covered that in my prior post). Listing Broker took an assignment of the buyer’s right to the escrow funds, but didn’t tell its client that right away. Then Listing Broker tried to strong-arm its client by threatening litigation if he didn’t accept $2,500 and release the escrow deposit to Listing Broker.
Breach of Fiduciary Duty and Chapter 93A Violation
The court was none too happy with Listing Broker’s course of action here. The court reaffirmed that Listing Broker had a fiduciary duty — one of the highest duties under law — to hold the funds for the benefit of the seller and not to engage in any self-dealing. The court found that Listing Broker’s collection of a debt against the escrow deposit while it was acting as escrow agent was a clear breach of fiduciary duty.
The kicker was that the court imposed triple damages and an award of attorneys’ fees under the Massachusetts Consumer Protection Act, Chapter 93A. So Listing Broker is now on the hook for $277,500 plus thousands in legal fees. Ouch!
Today’s strict lending and underwriting environment has resulted in quite a few delays and even losses of buyers’ financing for home purchases. Loan commitment deadlines are being pushed back due to underwriting delays, regulatory compliance and appraisal issues, among other delays. The worst case scenario for any borrower is the wholesale rejection of financing in the middle of a transaction.
What Is The Typical Mortgage Contingency Clause?
The Massachusetts “standard” form purchase and sale agreement contains a mortgage contingency clause which protects the buyer (and his deposit) for the period of time until he can obtain a firm loan commitment. The date is negotiated by the buyer and seller, and is usually around 30 days from the execution of the purchase and sale agreement, depending on the closing date. If the buyer cannot get a firm loan commitment by the deadline, he can opt out of agreement with a full refund of his deposit. Here is how a typical Massachusetts mortgage financing contingency clause operates:
In order to help finance the acquisition of said premises, the BUYER shall apply for a conventional bank or other institutional mortgage loan of $300,500.00 at prevailing rates, terms and conditions. If despite the BUYER’S diligent efforts, a commitment for such a loan cannot be obtained on or before October 15, 2010, the BUYER may terminate this agreement by written notice to the SELLER in accordance with the term of the rider, prior to the expiration of such time, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreements shall be void without recourse to the parties hereto. In no event will the BUYER be deemed to have used diligent efforts to obtain such commitment unless the BUYER submits a complete mortgage loan application conforming to the foregoing provisions on or before 3 days from the execution of this Agreement.
What If There Are Delays In Obtaining My Loan Commitment?
The buyer really has only two choices if the lender cannot deliver a firm loan commitment by the mortgage contingency deadline: (1) ask the seller for an extension of the loan commitment deadline, or (b) terminate the transaction. There is, however, a smart way to handle this situation.
I always couple a request for a loan commitment extension with notice that if the seller does not agree, then the buyer will exercise his right to terminate the agreement. That way, the seller has to make a tough choice: grant an extension or lose the deal. If the seller does not want to grant an extension, the buyer really has no other choice but to move on to the next home for sale.
Parties need to make mortgage contingency deadlines workable and don’t wait until the last minute to ask for extensions. See this post about a recent case for what happens when you don’t do this.
What If There Are Conditions In My Loan Commitment That I Cannot Control or Meet?
Loan commitments are often riddled with conditions which must be reviewed carefully with counsel. Sometimes, there are conditions that a buyer simply cannot meet or control. To account for this I always insert this clause in my Massachusetts purchase and sale agreement rider:
Application to one such bank or mortgage lender by such date shall constitute “diligent efforts.” If the written loan commitment contains terms and conditions that are beyond BUYER’S reasonable ability to control or achieve, or if the commitment requires BUYER to encumber property other than the subject property, BUYER may terminate this agreement, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto.
This protects the buyer in case there are those uncontrollable conditions, and also limits the buyer’s efforts in applying for a mortgage to 1 application.
What If There Are Title Defects Which Delay The Transaction And My Rate Lock Expires?
Under paragraph 10 of the Massachusetts standard form purchase and sale agreement, the seller has the option (or the requirement, depending on the negotiation of the agreement) to cure any title defects, and has up to 30 days to do so. Sometimes, during this 30 day cure period, the buyer’s rate lock will expire. In this situation, I insert the following clause into the purchase and sale agreement:
MODIFICATION TO PARAGRAPH 10: Notwithstanding anything to the contrary contained in this Agreement, if SELLER extends this Agreement to perfect title or make the Premises conform as provided in Paragraph 10, and if BUYER’S mortgage commitment or rate lock would expire prior to the expiration of said extension, then such extension shall continue, at BUYER’S option, only until the date of expiration of BUYER’S mortgage commitment or rate lock. BUYER may elect, at its sole option, to obtain an extension of its mortgage commitment or rate lock.
This gives the buyer an “out” of the transaction if his rate lock expires.
As always, feel free to contact me, Richard Vetstein, for any questions about the Massachusetts purchase and sale agreement process.
As a real estate attorney, I always take the time to fully explain to our clients the intricacies of the Massachusetts Purchase and Sale Agreement.
The purchase and sale agreement is the governing contract between the Buyer and the Seller regarding the proposed property to purchase. Most Buyers submit an initial Offer to Purchase to a Seller, which spells out the terms of the contract. The purchase and sale agreement supersedes the offer, and can be thought of as the “long form” contract. At first blush, the purchase and sale agreement, like most legal documents, can be difficult to read and comprehend.
Deal Terms
First, like all contracts, the purchase and sale agreement sets out the terms of the deal. These terms primarily are taken from the offer. This includes the names of the parties, the legal description of the property (taken from the current deed), the purchase price, the mortgage commitment date, the closing date, any Seller credits, and any agreed upon fixtures that will remain with the property or be taken by the Seller.
Title and Deed
Second, the purchase and sale agreement deals with the title to the property and the deed. It lays out the framework for a conveyance (a real estate transfer) in Massachusetts. The agreement spells out that the Seller conveys the deed to the Buyer in return for consideration, then the deed is recorded and the Buyer becomes the owner of the property. However, in Massachusetts, once the deed is recorded at the proper Registry of Deeds, then any title issues “run with the land.” Thus, the new owner becomes responsible for any outstanding encumbrances or liens that were not properly discharged. In order to protect the Buyer, the purchase and sale agreement provides that the Seller must convey “good, clear and marketable” title. Acting as the buyer’s or lender’s counsel, or both, attorneys will review the title exam and work with the Seller’s attorney to clear any title issues, so that the buyer will receive a certification of title and an owner’s title insurance policy.
Seller Responsibilities
Third, the purchase and sale agreement lays out the responsibilities of the Seller. This includes maintaining insurance and upkeep on the property until closing, obtaining a smoke and carbon monoxide certificate at closing, paying the broker’s commission, obtaining a 6(d) certificate for a condominium, and requiring that the taxes be paid by Seller up until the closing date (through an adjustment to the HUD Settlement Statement). The agreement also provides that the Seller’s agent (either the realtor or the attorney) holds the buyer’s deposit in an escrow account.
Anything But “Standard”
There is a note of caution about the standard form Massachusetts purchase and sale agreement. The standard form provides several hidden advantages to a Seller, I’ve written about on this Blog. Thus, buyers must have an experienced attorney revise the agreement and flag those built in deficiencies. For example, if a Buyer were to default prior to closing, the standard form document provides no cap on the damages; a skilled attorney will know to cap the damages at the deposit. The same is true if a buyer loses his rate lock if there is a delay of the closing; a skilled attorney would use language to protect the buyer in this situation.
An experienced attorney will produce a Rider to the purchase and sale agreement that will have language that protects a Buyer’s deposit and provides an aggressive layer of due diligence. For example, if the Buyer is purchasing a condominium, the Rider should have the Seller make representations that the association is not contemplating any special assessments, there are no pending lawsuits against the association, and the budget is in good order. Other issues include seller repairs, septic system/Title V compliance, radon gas, UFFI insulation, lead paint, and buyers’ access to the property while it is under agreement.
Since the P&S is “anything but standard,” an experienced real estate attorney who review and negotiates the document will certainly add value to the closing process.
This week, a very interesting decision involving the negotiation of a residential purchase and sale agreement came down from the Massachusetts Appeals Court in Coviello v. Richardson. Click here to view the decision. The case highlights the need for realtors and real estate attorneys to be proactive with respect to mortgage contingencies and requests for extensions.
The Facts
In the case, on February 12, 2008, buyer (Coviello) and seller (Richardson) signed the standard form Offer to Purchase, which provided that a Purchase and Sale Agreement would be executed by 5:00pm on February 26th. Under the mortgage contingency clause of the offer, which gives the buyer the right to cancel if she cannot obtain financing, the buyer was required to secure a firm mortgage commitment by February 29th. The realtor, who prepared the offer, made the first mistake here: requiring her client, the buyer, to obtain a firm mortgage commitment not even 2 weeks after the parties signed the offer. This was and remains completely unrealistic.
Predictably, the buyer and her broker had immediate concerns that they would be unable to meet the mortgage commitment deadline. The broker asked the buyer’s attorney, Scott Kriss, if he would ask the seller to agree to extend the commitment deadline for an additional week. According to the decision, the request was not immediately conveyed to the seller.
Two hours before the 5:00pm deadline to sign the purchase and sale agreement, Attorney Kriss sent an email to the seller’s attorney, Alan Sharaf, requesting the extension. The seller, who was dealing with a high-risk pregnancy, refused to extend the deadline. No agreement could be reached, and there was no tender or signing of the purchase and sale agreement. (It does appear that the pregnant seller got “cold feet” and backed out of the deal–the request for a one week extension is eminently reasonable and wouldn’t have exposed her to any significant risk).
The buyer sued, claiming that the seller’s refusal to agree to the extension was a breach of the deal. The Land Court initially ruled in favor of the buyer, but the Appeals Court overruled the decision in favor of the seller, holding that a jury would have to decide whether the seller repudiated the contract or would have proceeded with the original terms. The case will be heading to trial.
Take Away
In our opinion, the lesson for realtors and attorneys from this case is (1) make the mortgage contingency dates workable in the offer, and (b) if you are asking for an extension at the 11th hour, protect your buyer in case the seller refuses to agree.
First, the realtor should have used a more realistic mortgage contingency deadline. In the current underwriting environment, realtors should allow at least 30-45 from the signing of the offer for a mortgage commitment.
Second, in our opinion, the buyer’s attorney’s apparent delay in asking for the extension until the 11th hour certainly didn’t help the situation. He could have protected the buyer a lot more had he coupled the request for the extension of the mortgage commitment deadline with either (a) notice that if the seller would not agree, the buyer would opt out of the deal entirely, or (b) a tender of the purchase and sale agreement with the original deadlines (assuming the buyer would take on the risk of being unable to make the deadlines). This would have “boxed in” the seller to either agree to the extension or go through the deal, essentially calling her bluff. At least it would have enabled the buyer to have been in a much better position for litigation because now the fight is over whether the seller would have gone through the original deal. Granted, it appears that the pregnant seller had already made up her mind that she wasn’t going through the deal, no matter the reason.
To the credit of the realtor and attorneys involved, it’s much easier for me to play Monday morning quarterback.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
