May 12, 2016
Many times when I teach courses to residential and commercial Realtors, I ask this simple question:
What is the essential bargain going on between a buyer and a seller of real estate?
The reason for the question is that real estate professionals — Realtors, attorneys, investors, and lenders — frequently get caught up in the tall grass of the details of the purchase contract such as personal property, inspection contingencies, representations about property condition, earnest money issues, and on and on. All these things are important, but shouldn’t we first and foremost focus on the thing that brings everyone to the table to begin with?
But cutting to the quick of the real estate transaction, what is the buyer giving to the seller and what is the seller giving to the buyer?
Cash is exchanged for good title
The answer, very simply, is that the buyer is giving cash to the seller and the seller is giving a certain quality of title to the subject real property to the buyer.
It seems so obvious, that we may overlook this simple and fundamental truth.
Standard Board of Realtors Contract language
Indeed, the Cincinnati Area Board of Realtors/Dayton Area Board of Realtors form of Contract to Purchase buries the clause by which the seller’s obligation is made clear at paragraph 19 on page 6 of a 7-page contract. Not only that, but the critical clause is in the middle of that paragraph, starting after a semi-colon in the middle of a sentence:
[Seller shall]…convey marketable title (as determined with reference to the Ohio State Bar Association Standards of Title Examination) to the Real Estate by recordable and transferrable deed of general warranty or fiduciary deed, if applicable, in fee simple absolute, with release of dower, on [date]….Title shall be free, clear and unencumbered as of Closing with the exception of the following, if applicable: (i) covenants, conditions and easements of record….”
Goodness, that’s a mouthful, and from an attorneys perspective there is so much meaning in that part-paragraph.
Different standards of title quality
I have seen countless judges and attorneys blow past the issue of what quality of title must be conveyed by the seller at the closing. Indeed, I had one Judge tell me from the bench, confidently but absolutely incorrectly, that that Marketable Title Act (O.R.C. Section 5301.47-56) defines the quality of title that a seller must convey to a buyer. That’s hogwash. The Marketable Title Act simplifies and makes uniform the title examination process, but it does not attempt to tell sellers what quality of title they must covey to buyers.
Three distinctly different contract standards
It is the language of the contract itself that tells sellers what quality of title they must convey to a buyer and there are several different sets of standard language that may be used:
- The above-noted language from the standard CABOR/DABOR contract contains potential problems for a buyer as it requires a buyer to accept title subject to “covenants, conditions and easements of record.” Really? What if there is a highway easement running through the living room? Or how about a title problem I ran into recently that prevents an owner in Mt. Adams from building a second story on their house? There are all kinds of “covenants, conditions and easements of record” that could well prevent a buyer from making use of his property the way he plans. This standard CABOR/DABOR language mandates a buyer — even if they find and object to an easement before closing — to a accept title to the property impaired as it is. The only way to protect one’s self from this contract language would be to do a full title examination and read and understand the easements and covenants of record before even signing he contact. This rarely happens.
- Some “standard” purchase contracts provide that a buyer must accept title subject to all “covenants, conditions and easements of record” that “do not unreasonably interfere with the buyer’s intended use of the property.” This standard makes a whole lot more sense for the typical purchaser. Then, if during the title examination process an offending easement or covenant is discovered, the buyer would be excused from performing.
- Many commercial contracts contain a due diligence period for title, allowing examination and objection for a period of, say 14 days after contract signing. Thus, the buyer is not forced to accept anything at all of record, and the buyer is constrained to state his objections within a tight timeframe.
Date is important as well
We warn in this blog entry about the contract that doesn’t end, meaning that the buyer has the right to perpetually tie up title to a property while he decides whether or not to buy, and has no closed-ended obligation to actually close on the purchase. It is a terrible situation for a seller.
So, what happens if the buyer and seller leave blank in the contract the closing date? Well, since the obligations of both the purchaser and the seller have no contractual deadline, presumably they never have to close. Does that mean the seller never has to deliver a deed? That the buyer never has to tender the purchase price? That the contractual promises are simply illusory and thus unenforceable? Or, finally, that the parties must close within a “reasonable time”?
The cold reality is that in such a circumstance the parties have given lawyers something to argue over, which means time, expense and uncertainty to get a transaction closed, to get rid of a buyer who refuses to timely tender the purchase price, or even to force a dilatory seller to close.
The above-noted Board of Realtors contract language calls for, among other things, that a deed be “recordable” and “transferrable.”
There can be a host of reasons that a deed is not “recordable” and “transferrable.” The most common reason is that the there is a new legal description on the deed because since the prior transfer some land has been conveyed away, or the transfer is part of a cut-up of a larger parcel. In such circumstances, several things could be required, such as sign-off by the local planning commission, recording of a new survey plat and a “closure chart” showing that the legal description in fact “closes” from beginning point to ending point.
It is helpful for a buyer to require the seller to adhere to this standard.
Quality of deed
Finally, the contract will almost always describe the type of deed the by which the seller must convey title to the buyer. This blog entry thoroughly explores the distinction among a general warranty deed, a limited warranty deed, a fiduciary deed and a quit claim deed.
This one clause is where my eyes first go when I review a contract for a client — whether buyer or seller — for it encapsulates the essential bargain from the seller is to the buyer. Understanding this provision is fundamental to protecting your client and assuring that he is protected in the transaction.