How long to return deposits?

How Long to Return Deposits?

How long to return deposits?
By: James L. Goldsmith, Esq.

As a broker holding a deposit, how long should it take you to return it pursuant to the terms of a release signed by both parties or when sufficient time has passed (the 180 days or whatever it has been reduced to) and not litigation/mediation has been initated? I am hearing complaints that listing brokers are taking “too long” to return deposits when buyers are the recipients. I’ve not verified any of these complaints, but they are the focus of a good number of Hotline calls so I thought it merited discussion.

There are times when a deposit cannot be returned despite how evident one party’s entitlement to that deposit may be. We need an agreement between the parties which usually is in the form of a release; or we wait the passage of time and follow the formula for the deposit’s return that is set forth the agreement of sale. Rarely do we await a court order. These issues, however, are not the subject of the more recent complaints.

What I am hearing is that the escrow holding broker has received a release or has received the buyer’s letter demanding return of the deposit given the passage of time without resolution. In those circumstances, the broker has no skin the game and the parties have agreed (in the release or have pre-agreed in the agreement of sale) where that deposit is to go.

In most cases, deposits are returned to buyers because of a termination resulting from an inspection contingency, or, because the buyer did not get the necessary mortgage. Sellers, and in many cases listing brokers who hold the deposit, may be suspect that the buyer’s stated reasons for terminating are bogus, or that the buyer did not make a good-faith effort to get that mortgage. To punish the buyer for their pretextual termination sellers may encourage the broker to hold that deposit as long as possible.

So the question frequently is asked: how long does the broker have to return a deposit once entitlement is established? The agreement provides no answer. So we look to what a court would do.

I think just about any lawyer would give you the same answer. The broker has a “reasonable period of time to return the deposit.” What is “reasonable” depends on the circumstances, but it is hard to fathom that it would take a broker more than several days to issue a check. Perhaps if termination happens so early in the transaction, the broker might be justified in waiting until the buyer’s deposit check clears before making the return. A seller who wants a listing broker to drag his or her feet when returning the deposit should be ignored. If a complaint is made to the Real Estate Commission, it’s not the seller who is under the gun.

I understand that there are pockets in Pennsylvania where buyer brokers hold deposits. It is a practice I think that should be considered by those who don’t. Holding a deposit does not give the broker an advantage over the other. The situations when it should be released and the time of release are not dependent on which broker is holding the deposit. The ability to fund a transaction with a deposit, however, is shorter when the buyer broker holds the deposit simply because there is one less step in the process. A buyer makes their check payable to the selling broker and hands it to their agent when close to a decision. Then, even if the contract is executed via software, the buyer agent merely needs to hear that the offer has been accepted and then place it in his broker’s escrow account. Voila! The transaction is funded rather than having to await the additional step of transfer from the buyer broker to the listing broker.

Lastly, and while we are on the subject, why am I still taking Hotline calls involving convoluted facts of the transaction and questions of breach and entitlement to a deposit when the it is only $1,000? The fight is so greater than the reward and the cost to litigate so much greater than the amount in controversy that nobodies’ interests are served!

Home Inspectors

Attend Inspections

PART TWO

By: James L. Goldsmith, Esq.

Home Inspectors

 

Who, if anyone, should attend home inspections has been a topic of debate for as long as home inspections have been a standard element in a residential transaction.  Year ago when the topic came up at an NAR meeting of attorneys who represented state associations of Realtors, the room was divided, with roughly 50% saying that buyers should attend, but not their agents.  I remember one outspoken attorney claiming that if an agent was not present to hear the spoken word of the inspector, he/she could not be charged with failing to pass the inspection comments on.  As for me, I am not a supporter of “see no evil” or “head in the sand” approach.

Most of the lawyers at that NAR meeting, however, agreed that buyers should attend inspections.  The reason should be obvious, but consider a recent transaction where the buyer sought an inspection of the sewer lateral from the home to the municipal system located in the street.  The inspection primarily consisted of snaking a video camera through the lateral and visually assessing its condition.

The seller agreed to be present for the inspection so he could open the door to the inspector and direct him to the location of the line in the basement.  Neither the buyer nor the salespersons involved in the transaction chose to attend.  The seller, who was curious, watched the process and conversed with the inspector during the inspection.  As they watched the monitor, the inspector pointed out dips in the lateral and explained they were probably caused by substandard work when the house was constructed.  The inspector felt that the stone bed in which the lateral was placed was not sufficiently compacted and offered other criticisms that were either an educated opinion or complete conjecture.  He also expressed that the dips would get worse over time.  When the seller read the report he was surprised to see that, while the dips were mentioned, there was no reference to the hypotheses that were verbally expressed by the inspector.  The seller was so concerned that he contacted his lawyer questioning whether he had a disclosure obligation that went beyond the written report.

It happens all the time.  The inspector is generally all too happy to discuss his findings and the possible implications of those findings as he pokes about shining a flashlight in dark corners, behind water heaters and above drop ceilings.  Yet, it’s very likely that what will appear in the written inspection report will be an abbreviation of those comments, if they are mentioned at all.  Wouldn’t it be beneficial to the buyer to have the opportunity to ask the sewer inspector what causes dips, whether they remain stable and what is likely to happen over how many years?  More information is better.  When buyers are told to focus not only on written conclusions, but also the inspector’s musings and mutterings they will get more out of the inspection.

Home Inspectors

Untimely Repairs

PART ONE

By: James L. Goldsmith, Esq.

Home Inspectors

 

It happens.  Sellers agree to make repairs suggested by a home inspection, but fail to complete the job timely.  When this happens a buyer is faced, unfairly, with proceeding under a contingent plan (e.g., having repairs made post-settlement or taking cash in lieu of repair) or of delaying settlement.  Usually there is little choice.  The buyer is packed and ready to move or the mortgage commitment can’t be extended, etc.

What prompted this article was a recent call to the Hotline involving a transaction where seller was to have conditions repaired before settlement.  For any number of reasons the repairs were not made.  Buyers only learned of sellers’ failure at the pre-settlement walk-through.  The seller acknowledged the failure but offered to issue a check payable to the repairperson that would be given to buyers at settlement.  When the buyers expressed their dissatisfaction, sellers became indignant.  How unreasonable of the buyers not to accept a check in the full amount the repairperson had estimated!   Likewise, the listing agent was incredulous that the buyer agent didn’t find this to be an acceptable alternative to what had been agreed to: repairs made before settlement.

An agreement is an agreement is an agreement.  If it was agreed that repairs were to be made before settlement!  It really doesn’t matter that the sellers and listing agent feel that providing a check in the amount of the repairs is an equivalent.  It is not.  Repairs frequently lead to the revelation of other issues requiring repair.  The cost of materials can rise.  Estimates are not always guaranteed.  Repairpersons go out of business or get sick or worse.  Further, the parties agreed that the burden of resolving the matter would be borne by sellers.  When the sellers deliver a check at settlement, the burden of repair falls on the buyer.  This was not the bargain the parties struck.

Certainly a buyer can hold firm and demand that the terms of the agreement are honored.  But, at the price of delaying settlement and the well-made plans of buyer, this is usually not a satisfactory alternative.  Further, listing agents and sellers quickly understand that buyers may have little choice.  What do you, as a listing agent, consider appropriate?   Beyond the legal obligation, is there a moral obligation that your sellers complete the tasks that they agreed to undertake?  RELRA requires licensees to advise their clients of the status of the transaction and an argument can be made that as a listing agent you have an obligation to poke in every now and then to determine that your seller is complying with their agreement.  Should a buyer agent be inquiring as to the status of repairs at the risk of being labeled a pest?

The fact is, buyers have a right to enforce the agreement, including seller-promised repairs.  While it is rare that a buyer will refuse to attend settlement until the terms of the agreement are satisfied, it happens.  Further, if I were negotiating on buyer’s behalf, I might anticipate delays in repair and, as part of the change in terms agreement, require that repairs not made by settlement will exact a payment into escrow at settlement of 1 ½ to 2 times the projected cost of repair.  It’s not customary, but I do know agents who make this a routine point of negotiation when repairs have to be undertaken.

The best transactions occur when a seller receives all of the purchase money at settlement and where the buyer receives all of the property promised, at settlement.

Real Estate What If Question

What if?

Real Estate What If Question

By: James L. Goldsmith, Esq.

These two words are the start of many questions by those who draft contracts, including agreements for the sale of real estate.   Consider Paragraph 18 of the PAR standard agreement entitled Maintenance and Risk of Loss.  This paragraph was borne of the following “what ifs?”  What if the HVAC system or other systems fail after signing but before settlement?  What if the seller is unwilling to repair within the sale price agreed upon?  What if the seller, instead of repair, promises to credit the buyer with the fair market value of the system at the time the agreement was reached?  What if the seller refuses to do anything?  What if the buyer is willing to make the repair and what if the buyer is not?  And you could go on and on and on.

Well drafted agreements are more likely to go beyond basic terms in order to deal with the possibility of intervening events.  Having an agreement that charts a path through all of the possibilities means that the parties don’t have to pause when one of these events occurs in order to negotiate a resolution.  The problem is anticipated and the fix covered.

When teaching, I frequently reference the fact that the agreement of sale is 14 pages long because it covers all of the possibilities and eventualities.  We could strip the agreement down to a 3-4 page agreement, but then when issues arise we would be stuck negotiating a new set of terms and conditions.

The problem addressed by this article is that when agents encounter a situation not covered by the agreement or a standard addendum, they may draft an addendum that doesn’t ask all of the “what ifs.”  This usually happens when the parties are drafting a change in terms addendum following an inspection report that reveals a problem.  When a buyer agent proposes that the seller make a repair, has the agent asked what will assure that the seller selects a qualified, experienced repairperson who will use A-grade materials versus a semi-qualified handyman who uses salvaged parts?

A recent call to the Hotline underscores the problem when the “what ifs” are not asked.  The property in question was serviced by a septic system that failed the buyer’s inspection because of a saturated drain field.  The drain field was wet, perhaps because of a malfunction, but certainly because of the heavy rains and snow that preceded the inspection.  The buyers were gung-ho on going forward with the purchase, but they certainly wanted recourse if a subsequent inspection found a problem.  With the “help” of their agents, the parties agreed that seller would get approval of the drain field by July.  Settlement was March 1.  In late March there was a major sewage back-up that may be related to the drain field.  Seller refused to take any responsibility saying that the agent-drafted agreement merely said that the seller would obtain a passing inspection by July.  July was months away; regardless, the agreement didn’t say that the seller had responsibility if seller couldn’t obtain a passing drain field inspection.

It’s clear that the buyers’ agent hadn’t asked “what if the seller is unable to obtain a report that the drain field was in satisfactory condition?”  In fact, the agent missed asking a whole lot of “what ifs” and the result was an abysmal set of words that covered little.  The aftermath will include litigation.

Effective draftsmanship is a skill and my belief is that licensees are not well trained in it and should probably defer to published standard forms and lawyers.  There is a legal doctrine that holds that ambiguities in draftsmanship are construed against the draftor.  This means that whoever penned the ambiguous language will find that the interpretation accepted by the court is the one most favorable to the other side.  If you wheeled the pen you better draft well and in a manner that can lead to no confusion.  There is nothing wrong with asking your clients to obtain the advice of their counsel.  There is nothing wrong with using tried and true standard forms that go through rigorous scrutiny.  Best of all, however, is having a transaction close only when all lingering doubt, problems and contingencies are resolved.  When the buyer gets everything bargained for in exchange for the full consideration, there are few “what ifs” that have gone unanswered.  Put money in escrow to cover a roof repair and we begin to think what if the repairperson finds more damage than was anticipated; what if a contractor can’t be engaged to complete the work before the balance is to be returned to the seller; what if  . . . what if . . . what if.

Copyright © James L. Goldsmith, Esquire, 2019  |  All Rights Reserved

Mr. Goldsmith is an attorney with Mette, Evans & Woodside and serves as general counsel to PAR.  A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends Realtors® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. 

Getting Creative

By James L. Goldsmith, Esquire

Agreement Photo

The most dangerous clause in the Standard Agreement for the Sale of Real Estate (ASR) is found in our current Paragraph 32(B), Additional Terms. Here’s where agents can let loose with the most creative use of the pen imaginable! A problem is, that when these works of art fail for any reason, they are likely to penalize the author (agent) and his or her client. Most of you are familiar with the legal maxim “ambiguities are construed against the drafter.”

We, the Hotline attorneys, hear from many of you who understand the potential risk of drafting special clauses and who want us to provide the language. Involvement in a specific transaction is beyond the scope of what the Hotline provides, but I understand why you ask. You really want to help your client even if it involves undertaking a job with which you are not completely comfortable. You think your client may think less of you if you say that this is something you don’t traditionally provide or that feel uncomfortable drafting the language.

Entering into an agreement of sale involves risk. The risk belongs to the buyer and seller. Drafting unique provisions that may be required in a particular transaction has tremendous impact on the buyer and seller. Out of concern for your client, it is best to refer them to a lawyer experienced in the type of transaction in which your client is involved.

Some modifications may be easily made without resorting to lawyers. Unless the modification is one commonly made, discuss the issue with your broker or office manager and have them review any language you propose. Better to have someone else draft it and have it be their problem.

To be sure, the Pennsylvania Supreme Court has ruled that real estate licensees may draft agreements that arise from the efforts of a licensee in a specific transaction without engaging in the unauthorized practice of law. That decision, however, dates back to 1934 and times have changed. Today, it is fairly easy to rely on the standard agreement and the many standard addenda available. It’s rare that a transaction calls for unique or specialized language and if that is the case then it’s likely to be a complicated provision. Rather than tackle a drafting challenge, refer the buyer or seller to their lawyer. Not only will you duck any potential bullet, you won’t have the angst of doing something you are uncomfortable with. Not only that, your pay remains the same and your client is getting the level of service he or she needs.

When a Hotline caller asks me to help draft special clauses I, of course, delve into the situation and the need for unique language. The explanations vary. One recent caller was trying to accommodate a 1031 exchange. I asked how many 1031 exchanges the agent had handled and the answer was “this is my first!” I advised that after 40 years of practicing law I did not feel comfortable handling 1031 exchanges as I’ve referred these transactions to my tax attorney partners in the practice who know what they are talking about. Tell the client that the task falls outside of the scope of what a licensee skilled in the marketing and sale of real property generally undertakes. Refer your client to an attorney. It is my belief, that undertaking such a task may very well fall under the unauthorized practice of law, in addition to subjecting you to license revocation or disciplinary measures.

Another caller was trying to draft a swimming pool inspection clause. This one was easy because it is already in the agreement in Paragraph 12, Home/Property Inspections. If you have any concern write that the swimming pool is one of the items to be inspected pursuant to the elected inspection provision.

Lawyers are criticized for taking a simple concept and turning it into a page-long provision. The reason, however, is that lawyers understand the importance that no ambiguities exist and that every “what if” is addressed so that there are no questions. And we don’t always get it right.

In this business the pen is indeed far mightier than the sword. Wield it carefully.

Copyright © James L. Goldsmith, Esquire, 2018
All Rights Reserved

What’s the Biggest Mistake a Licensed Professional Can Make, When Faced with a State Board Investigation Notice?

By: James Goldsmith. Esq.

James Goldsmith. Esq.

Responding on your own to a licensing investigation or meeting with the board investigator, without legal representation, is one of the biggest mistakes a licensed professional can make when faced with an investigation notice from the state board.

If you receive an investigation notice from the state’s professional licensing board, immediately contact an attorney who is knowledgeable in professional license defense and familiar with state licensing boards and the disciplinary process. Not having an experienced attorney to provide a vigorous defense can adversely impact the outcome of the inquiry and put your professional license in peril.

The laws and regulations surrounding Pennsylvania’s professional licensure are complex and can widely vary from one profession to another. Our attorneys have an in-depth understanding of professional licensing and provide experienced representation. From a wide range of issues, from representation at administrative hearings to complaint investigations and disciplinary actions we guide clients through each step of the process to protect their professional licenses.

Selling Real Estate in an Era of Modern Surveilling

By: James L. Goldsmith, Esq.

You either have firsthand experience or have heard stories of how modern surveillance techniques are entwined in the sale of real estate. Baby cameras, pet monitoring applications, security systems, and other surveillance equipment with varying degrees of technological and recording capabilities are now common features in homes. Some systems have no audio capabilities and are only available to view in real-time, while others may also record and store both audio and video data.

Real estate licensees and their clients must be aware of the nuances of video and audio surveillance laws to protect themselves from potential invasions of privacy, breaches of confidential information in violations of state and federal video and audio surveillance laws.

Video Surveillance

Under Pennsylvania law, a person may not videotape, photograph, or otherwise record a fully or partially nude person in a place where the person would have a reasonable expectation of privacy (hereinafter “REOP”) without the person’s knowledge and consent. This means that one cannot have surveillance equipment in a place where a reasonable person would believe they can get undressed (e.g., a bathroom) without first notifying the person and obtaining their consent. Where a property is being shown to prospective buyers, the seller should disable and/or remove any surveillance equipment in bathrooms or other locations that are subject to this heightened standard of privacy.

The REOP standard does not, however, have clear boundaries. Likely, a prospective buyer would not be able to successfully argue that they have a REOP everywhere in a seller’s home. Could a buyer successfully argue that he or she had a REOP in a bedroom of a home they were touring? Likely not, but life presents situations that can pose difficult questions. Does a nursing mother have a reasonable expectation of privacy as she nurses her child in a chair in the seller’s bedroom? To avoid any question of liability, a seller would be well advised to notify prospective purchasers that video equipment is located throughout the property and that special arrangements can be made to accommodate changing clothes, nursing, etc. Certainly avoid the placement of video equipment in bathrooms.

Regardless of the purpose of the video technology – nanny cam, baby monitor, live-feed-pet-recorder – sellers, buyers, and their real estate agents should keep a few points in mind: 1) use of video surveillance equipment is not per se illegal, so long as it is located in a place without a heightened standard of privacy, like a bathroom; 2) a place with a REOP is analyzed on a case-by-case basis and is subject to interpretation by a court; and 3) if there is any question of whether a person would have a REOP in a certain location where video surveillance equipment is operating, always notify the buyer and buyer’s agent and obtain consent before the showing takes place.

Even where video surveillance technology is restricted to places where no REOP is likely, notification to buyers and their agents may still be advisable. A buyer who discovers the presence of video surveillance in non-REOP areas may be offended regardless of the whether the owner has followed a protocol that is legal. Notice to the effect that the home is equipped (and perhaps being sold with) a video security system for the protection of visitors as well as owners may put prospective buyers at ease.

Another choice is to remove or disable such equipment or obtain written consent from buyers and their agents in scenarios where the equipment is visually recording them in various locations throughout the home. While these suggestions would not seemingly be required in living rooms, hallways, dens and other locations where there is not a REOP, the practice prevents any potential argument that an invasion of privacy took place.

Audio Surveillance

Unlike video surveillance, the laws on audio surveillance are more strict and clearly defined. Under the Pennsylvania Wiretapping and Electronic Surveillance Control Act, which is more stringent than federal law, if a person has an expectation that his or her oral communication is not being recorded, no other person may intercept that communication without consent from all parties involved (subject to some caveats for law enforcement, court order, etc.). This law is definite and not subject to the interpretation of a REOP standard like discussed above for video recordings.

As applied to real estate transactions, buyers and their agents likely have an expectation that their oral communication during a showing is not subject to recording. Therefore, a seller should not be audio recording or otherwise intercepting audio from the buyer or buyer’s agent, or any other parties, during a showing of their property. If a seller has audio devices, a video surveillance system with audio capabilities, or other recording devices in place, he or she may keep the devices in operation, only if he or she first obtains consent from all parties involved in the communication, which should be documented in writing. You can decide for yourself whether maintaining audio surveillance will enhance the prospect of selling the home!

While the laws discussed above must be followed by all parties involved in a real estate transaction, real estate licensees face additional penalties under the Real Estate Licensing and Registration Act, the Rules and Regulations of the State Real Estate Commission and perhaps also for violating the Code of Ethics.

As this is an emerging field, stay alert for new and changing rules and legislation, and don’t forget to smile. You may be on candid camera.

Copyright © James L. Goldsmith, Esquire, 2018
All Rights Reserved

A Question of Coverage

by James L. Goldsmith, Esq.

Mistakes happen. Consider the case of listing agent Robert. Robert happened to be on vacation when he received an offer at list price. He reviewed the standard form on his cell phone and reported to the sellers that it looked great. The agreement was executed electronically as was the sellers’ estimate of closing costs.

At settlement the sellers and listing agent were surprised that the net proceeds were $9,000 less than estimated. The reason: the agreement of sale called for seller assist that accounted for the $9,000 discrepancy. Robert has filed to take note when reviewing the offer on his cell phone. Nearly two years later when a claim was asserted and I was engaged to defend Robert, he readily admitted his error.

The claim asserted against Robert was a disciplinary complaint (order to show cause) filed by prosecutors with the Commonwealth of Pennsylvania, Bureau of Professional and Occupational Affairs. Robert was ready to sign my engagement letter, though I first suggested that he determine whether his errors and omissions (“E&O”) insurer would cover this. Many E&O carriers will pay defense costs for their insured’s involved in disciplinary matters, though they will not pay any fines levied. In most cases, a deductible will not apply.

Determining whether coverage existed was difficult. Robert was employed by Broker A on the date of his error. Though Robert then discussed the matter with his broker, his broker decided not to report it to the E&O carrier. Robert’s broker reasoned that the sellers were equally culpable for their loss because they failed to read the agreement of sale and because no threat of a suit had been communicated to her or Robert. Why risk having E&O rates increase over a report that does not come to fruition, the broker reasoned.

At the time of his receipt of the order to show cause, Robert was practicing with Broker B. At issue is whether Robert is insured for his defense costs and, if so, whether through the insurer for Broker A or Broker B.

My advice to Robert was to have both Broker A and B report the claim to their E&O insurers. Broker B did so and the quick response from the insurer was that there was no coverage. Robert was not affiliated with Broker B at the time of the occurrence.

Broker A was less compliant. Why report a claim for a past sales agent when it may lead to increased premiums? My advice to Robert was to insist that Broker A submit the claim. Robert’s contract with Broker A stated that Broker A would provide E&O coverage. Robert had kept his end of the deal as a sales affiliate, the broker who benefitted from Robert’s service should likewise fulfill her obligations. Broker A eventually relented and submitted the claim. Because the occurrence at issue happened while Robert was with Broker A, her coverage was the applicable policy and the claim should be covered.

Robert’s identifying the right E&O carrier was not the solution to Robert’s dilemma, unfortunately. All policies require claims and potential claims to be reported promptly and you will recall that Broker A upon learning of the matter had decided not to report it to her insurer! Years later when a case was initiated and after relenting to Robert’s demand that she report it, the E&O insurer wanted to know why the broker had not notified it of the problem. Whether Robert or his broker had knowledge of a potential claim. While the sellers did not threaten to file suit nor advise Robert that they would be filing a disciplinary matter, Robert certainly knew that his error might subject him to liability. And no, he didn’t make the report because as you read above, his broker did not want to do so.

Whether Robert will have coverage under Broker’s A insurance is, as of this writing, not determined. If Robert is denied coverage, does he have a claim against his broker for failing to report it to the E&O insurer at or near the time of the occurrence? There are too many issues to state with certainty, including Robert’s failure to insist that his broker report the occurrence. Regardless, it is a situation that pits an agent against his former broker.

The lessons to draw from this situation are several. When a mistake is detected, report it. Your premium is not increased because you have reported a potential claim. When a claim is subsequently filed, you can then determine whether you will have it covered through your E&O policy. [Note: I always suggest that an insured broker/agent submit a claim to their E&O insurer! It is risky not to do so because even the smallest claims can cost more to defend than imaginable and damages have a way of aggregating as time passes.]

Another important issue is determining what your coverage includes. Ask questions of your insurance agent. If a claim is asserted against a former sales agent, but does not include the broker as a defendant or respondent, does the former sales agent have coverage through the broker’s policy? Agents, ask questions of your brokers. When transferring to a new broker, find out who the E&O carrier is and ask questions about coverage for incidents that occurred previous to your employment. Learn the differences between a claims-based and an occurrence-based policy.

Lastly, and this is especially so if you determine that coverage exists, don’t fret. As I told Robert, his mistake was hardly a condemnation of his skills and competency. It happened. He has undoubtedly made worse mistakes that could have far graver consequences (e.g., looking at a text message while driving). It happened, it is not a “deathbed issue” (one that will be Robert’s last thought on that fateful day) or anything more than a financial burden. Make the right decisions with regard to E&O coverage and sleep peacefully.

The Superior Court Recently Ruled on Two Issues Under the Real Estate Seller Disclosure Law that Realtors® Should be Aware of

The first question decided by the court was whether the seller was liable for failing to deliver a Property Disclosure Statement, where the agreement included an “as is” clause. The second question was what constitutes “actual damages” as the term is used in the Real Estate Seller Disclosure Law (RESDL) to define a buyer’s remedy for breach of the statute.

The case involved the sale of a 165-year-old two-story, single-family home with barn, garage and greenhouse structures that had been used as a residence and as the site of the seller’s commercial plant nursery. Upon the advice of counsel, the seller did not provide a Seller’s Property Disclosure Statement, because the property was a commercial property, because the agreement was an “as is” sale and because seller claimed to be unaware of any property defects. The parties to the transaction were not represented by real estate brokers and the Agreement of Sale was not a Pennsylvania Association of Realtors® standard form.

That the property was partially used for a commercial purpose is of no consequence, given RESDL’s applicability to the sale of residential dwellings, which this sale included. The seller’s next position was that the “as is” clause was sufficient to put the buyer on notice that there may be liabilities attendant to the purchase and relieved the seller of the obligation to provide a Seller’s Property Disclosure Statement. This position was as easily disposed of as the first. RESDL states that “a signed and dated copy of the Property Disclosure Statement shall be delivered to buyer….” The court noted that “shall” generally imposes as a non-discretionary duty; hence, whatever the parties may have intended or agreed to, RESDL imposed a duty upon the seller to deliver a completed and signed disclosure statement and seller’s failure was a breach of that duty.

Lastly, with respect to seller’s liability, seller asserted that his good faith reliance on the advice of counsel established a defense. Counsel had apparently advised that no disclosure was required in a transaction with an “as is” agreement. Further, though the sale included a dwelling, counsel considered it to be a commercial property that did not require seller’s delivery of the disclosure form. This argument was also denied as the court again took note of the mandatory language of RESDL, and noted that the seller was unable to cite to a case holding that a mandatory disclosure can be negated by the advice of counsel.

The next major issue considered by the court was what was meant by “actual damages” as that term is used in RESDL. At trial, evidence was submitted that the expected cost to repair the property was about $60,000. But an appraiser also testified that the value of the property at the time of purchase was about $125,000 less than what it would have been had it been in average condition.

The buyer argued that the proper calculation of “actual damages” should include the reduction in property value as well as other consequential damages, but the trial court awarded based solely on the anticipated cost of repairs.

The Superior Court undertook lengthy analysis of the term “actual damages” as used in, but not defined by, RESDL. In doing so, the court noted that no Pennsylvania case has defined “actual damages.” Without clear precedent, the Superior Court dug into the legislative history of RESDL to determine its intent. Deferring to its recognition of RESDLs “protective purpose” and considering the measure of property damages in other types of cases, the Superior Court concluded that “actual damages” as used in RESDL “may be determined by the repair costs, capped by the market value of the property.” It thus upheld the trial court’s approach to damages, though the case was remanded because of some technical questions as to exactly how that number was determined.

In this case, there was no evidence to suggest the property was not repairable. Other cases have suggested that when property is not repairable then the difference-in-value damages are appropriate.

For more information about this case, see Phelps v. Caperoon found at 2018WL3016477, or at 2018 PA Super 171 (2018).

Vituperativeness: Is There Ever a Reason?

Vituperativeness-Is-There-Ever-A-ReasonBy: James L. Goldsmith, Esq.

My wife and I were recently sharing a farewell dinner with a couple moving from the mid-state. Their home was sold and packed. They were letting down their hair after a week that was particularly demanding, both physically and mentally.

The wife of this couple, Betsy (not her real name) had called me a month earlier about their buyers’ demand to visit the house with a contractor to take measurements and make observations. The buyers’ agent claimed that this was one of two pre-settlement walk-through inspections to which the buyers were entitled. “Pre-settlement walk-through” is not defined in the agreement, but we know its purpose is to enable the buyer to assure that all conditions prerequisite to closing have been satisfied. Whether this was such a walk-through is not so important to this article and, in fact, Betsy would ordinarily have permitted it without a blink. The problem was that her parents were visiting from out of town on the day the buyers were demanding access for their entourage, and Betsy’s mother was recently found to be in the early stages of Alzheimer’s. Betsy’s adult children were in town and it just wasn’t a good time to have strangers bumping about the property. So, Betsy tried to put her foot down.

Ultimately the standoff was resolved and the buyers came through the property as they desired and Betsy’s angst was short-lived. The problem, and the point of this article, involves the communication between the buyers’ agent, demanding the visit, and the listing agent who was trying to guard her clients. Because the property is located in my neck of the woods, I knew both salespersons. I believed both to have sterling reputations and the buyers’ agent is on my short list of agents to whom I would gladly refer business and about whom I have given glowing reports.

Though the standoff between the buyers and sellers was brief, a few emails were lobbed from buyers’ agent to listing agent and back. Betsy was particularly distressed to read an email from the buyers’ agent that her agent forwarded it to Betsy. It referred to Betsy in rather unflattering terms. Had I been the listing agent I would not have forwarded it to my client, but would have passed along the relevant part of the message. No transaction benefits from high emotion and Betsy went off the rails upon reading the email.

By the time Betsy and her husband were sharing this story over our farewell dinner, she probably had repeated the same complaint to countless others; and I am sure she referenced the buyers’ agent by name. In a business, largely based on word-of-mouth, I can’t imagine how deleterious it is to have stories like this repeated.

By contrast, I recently defended a broker in an ethics proceeding brought by a consumer. The broker was not specifically involved in the transaction, but had provided advice to one of his agents who was representing the buyer. This broker, too, has a sterling reputation. I have never known him to be other than a gentleman in his comportment, dress and communication.

To properly defend him I asked and received all of his email exchanges with his agent. By contrast to the bomb Betsy received, this broker’s emails were thoughtful and considerate to the point where the introduction of his file would cast him in a good light, regardless of the relevance of the email to the issues at hand.

My immediate thought when reading his email was to contrast his approach to that involving Betsy’s situation. In fact, I talked to this broker about the contrast and how impressed I was that he was thoughtful and articulate in his email. He told me that he always made a point of doing so and always avoided invectives, vituperatives, and other euphemisms for insulting and abusive language. Fittingly, this is a man who always wears a suit and who at all times comports himself as a businessman, respectful of his colleagues, clients and adversaries.

There are other reasons for maintaining decorum in your communications. When defending brokers and agents, my first request is for a complete copy of all files including notes and email. I require the production of the same from adversaries through rules of court that require production of documents. Cases are won and lost on a judge’s and/or jury’s assessment of a plaintiff’s and defendant’s written communication. When a jury dislikes a party it is hard to overcome the prejudice. But even a party who’s made a critical error will garner sympathy from gentlemanly and gentlewomanly behavior. Save your invectives for private moments. Draft your written communications as though you will be judged by it.