Some caveats about real estate closings
Whether you're setting up a closing for multiple corporations or for a couple buying a single-family dwelling, check out these items before your clients sign that final contract.
by Linsey Martin-Bowen
Perhaps John and Mary down the street have come to your lawyer boss to help them draw up documents to buy the chateau of their dreams. Or perhaps Big Corp has decided to buy out Little Corp's property and needs your boss to iron out the details. No doubt, your boss will pass on some of this workload to you. So what can a paralegal do to help a real estate closing run more smoothly?
With a little background about real property (or that property attached to "dirt") and about the real estate sales process, a paralegal can assist an attorney immensely by spotting items--that if left unchecked--could fester into future headaches for a buyer or a seller.
A bit about estates
Back in the days when the Sheriff of Nottingham chased Robin Hood through Sherwood Forest, Norman lords parcelled out their estates, from the king, the ultimate landowner, to lords and knights in return for loyalty and civil or military service. Obviously, those eleventh century land exchanges paralleled tenured appointments more than property sales. But those bargains sprouted the roots of what has often become a property student's greatest nightmare: estates and future interests. And they're the foundation upon which contemporary land conveyances are built.
Today, two types of estates exist: freehold and nonfreehold. Real estate sales contracts convey freehold estates; leases form agreements about nonfreehold estates. Then, the freehold estates break down into three main categories:
Of course, these concepts become confusing when those categories break into subcategories, such as fee simple absolute, fee simple, subject to condition subsequent, or fee simple, subject to executory limitation. But generally these terms aren't a problem when a law firm handles a standard real estate closing. Almost all deeds today convey estates in fee simple absolute. And most preprinted deed forms include the "heirs and assigns forever" wording.
Fee simple. With the potential of enduring indefinitely, these estates traditionally included the words, "and his heirs" or "and her heirs and assigns." But often, no special words are necessary. Thus, "to A" denotes a fee simple estate.
- Fee tail. Not recognized in most jurisdictions today, a fee tail had the potential of lasting until the purchaser's line of descendents expires and is denoted by "and heirs of his body."
- Life estate. The words, "to A for life," create a life estate that lasts until the buyer's death. And a life estate pur autre vie creates an estate lasting until another person's life ends.
A paralegal may be asked to ensure that a real estate title is free and clear of encumbrances or liens. Using a title company to run a title search is the best bet. Often, title companies offer a discount (as high as 40 percent) on property when its owners used the same title company--or one from a local pool of title companies--when they bought the real estate. So when a paralegal phones the title company, she should ask about this discount.
The paralegal or lawyer handling the closing should warn a married person selling real estate his spouse doesn't own jointly with him that title companies generally have both spouses sign the deed. Why? To prevent any possible future claims against the title. Title companies--and of course, buyers--want that title free and clear of any potential liens or encumbrances.
The sales contract should also specify a time limit, such as 30 days, for a "cure period" when a seller must remove any defects in the title. When a contract neglects to fix a time for the seller to remove defects, the courts tend to allow a "reasonable time" for this activity. The problem is, that reasonable period may extend to five and a-half months. See Wanger v. Zeh, 256 N.Y.S.2d 227 (1965) and Johnson v. Schuchardt, 63 S.W.2d 17 (1933). See also Brum Realty, Inc. v. Takedo, 613 N.Y.S.2d 372 (1994). The Brum court held that "time of performance is not normally of the essence unless the contract so provides" Brum, 613 N.Y.S.2d at 374.
Although legal descriptions often appear confusing, keep in mind that a person preparing a real estate sales contract usually need only copy the legal description from the deed the seller already owns. Nonetheless, many experts suggest that a buyer order a survey to ensure he will own what he intends to own. So a legal rep might suggest this to a buyer before preparing a description. And then, paralegals would do well to perform the following tasks:
Sometimes a conveyance will include a negative appurtenant easement. Historically, courts have restricted negative easements to three types: those for light and air, for subjacent or lateral support, or a scenic or solar easement. (For example, in mountainous areas, property may carry a negative appurtenant easement that limits the owner to constructing a one-story building so the structure doesn't block his neighbor's view.)
- Proofread the contract, survey, title evidence, and conveyancing instruments to ensure that the legal descriptions match.
- Consult with the parties to ensure the words in the legal description conform with their intent.
- Check that the deed includes any conveyances of appurtenant easements to the property. An appurtenant easement "runs with the land." These easements include rights to access the property, such as roads and driveways, water, and water rights, especially in Colorado.
In contrast to an appurtenant easement, an in gross easement is "attach-ed to a person or an entity," not to the land. Such an easement allows a phone company or cable company the right to set foot on the property.
Accordingly, sometimes a contract will describe rural land by referring to surrounding properties or landmarks. Such a contract may have required the buyer to procure a survey for the seller to use when drafting the land's legal description. The surveyor prepared the description by tying it to monuments he placed in the ground. Likewise, the contract drafter could have tied an old description to momuments, such as trees no longer existing. If so, the seller must provide or have a surveyor provide new reliable monuments.
- Check legal descriptions carefully. In some geographical areas, the legal description includes a recital of the source of title. An example of this would be language such as " . . . being that property conveyed to Grantor by a deed from Smith to Grantor, dated November 1, 1996, and recorded November 2, 1996, in Book 1234 on Page 5678." Check to ensure its dates match the recorded dates.
If a paralegal is called upon to write a legal description using the six-mile-square Township survey system, the rule is twofold:
For example, such a legal description would read like the following:
- identify the fraction lot before the whole lot, and
- list the divisions in this order: section, township or tier, range. (The tiers run north or south of the baseline, and ranges run east or west of the principle meridian.)
Part of the Northwest 1/4 of the Southeast 1/4 of the Northwest 1/4 of Section 17, Township 48, Range 33, in Kansas City, Missouri, described as follows: Beginning at a point 25 feet West of a point 149 feet South of the Northeast corner of said 1/4 1/4 1/4 section; and running thence West parallel with the North line of said 1/4 1/4 1/4 Section 134.5 feet; thence South parallel with the East line of said 1/4 1/4 1/4 Section 52 feet; thence East 134.5 feet; then North 52 feet to beginning.
On the other hand, more and more warranty deeds contain legal descriptions as simple as the following:
LOT 289, LEAWOOD, a subdivision in the City of Leawood, Johnson County, Kansas, according to the recorded plat thereof. Subject to reservations, restrictions, easements, covenants and special assessments, if any, now of record.
Some jurisdictions, such as those in New York, require legal descriptions to include the street address, too.
What about warranties?
In the "granting" clause, a general warranty deed should use the terms, "grant, bargain, and sell," or similar words that create warranties of title under a statute or the common law, noted Julie M. Cheslik, J.D. Cheslik teaches property classes at the University of Missouri-Kansas City School of Law.
Why require a general warranty deed? Cheslik stressed that a real estate contract should stipulate that the buyer will receive a general warranty deed--which provides six warranties of title--to ensure he receives a seller's warranty that the seller holds and can transfer the title. "A special warranty deed gives only two warranties of title," she added.
And legal reps should reserve a quitclaim deed for special situations. Generally used to transfer one party's interest to the other in a former joint tenancy (such as after a divorce), a quitclaim deed often uses the terms "release, remise and quitclaim." And note--the joke about selling a gullible person the Brooklyn Bridge holds here. A quitclaim deed will only transfer whatever interest the seller owns. This means, if the seller doesn't truly own an interest, or say, he owns only a life estate in a property, the buyer will only receive what that seller owned.
Today, about every U.S. jurisdiction requires sellers to disclose any known flaw or problem with their buildings. In fact, during the past decade, some jurisdictions, such as in New York, required sellers to report "psychologically impacted property." This meant sellers had to disclose if a murder occurred, a resident on the property had AIDS or tuberculosis, or if ghosts had been spotted on their real estate.
Cheslik explained that although some courts deemed these items "material," a number of state statutes disagree. Missouri and other states don't consider these items "material" and thus, don't require them to be disclosed. A wise paralegal will check what must be disclosed in the real estate's jurisdiction. Generally, states agree about what's important.
Insert those inspections
Most lenders and many states require two types of property inspections: termite and mechanical.
Cheslik suggests that a seller order a termite inspection before he puts his property on the market because if termites have infested the house, it's best to treat the property immediately. And buyers tend to shy away from property that must be treated.
Generally, the seller pays for the termite inspection (although this can be negotiable.) The buyer usually pays for the mechanical inspection. But a mechanical inspection only guarantees that the electrical systems and so forth are functioning correctly on the day they're inspected.
So many sellers, especially of older homes, opt to purchase warranties (that usually run between $300 and $400) to help give a buyer peace of mind. Thus, if an appliance or a furnace breaks down within a year or so after the purchase, the buyer need only satisfy any deductible fees, and the warranty covers the repair costs.
Some private buyers order environmental inspections. But others forego them because they find it more economical to treat a house for radon later than to up the inspection fees an extra $300 when they're saving to close on a house. But a corporate buyer can't afford the luxury of ignoring environmental concerns. In fact, he should run soil tests for pollutants.
Why? The Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) allows courts to hold owners of toxic waste sites liable even if they didn't pollute the land. (See Tanglewood East Homeowners v. Charles-Thomas, Inc., 849 F.2d 1558 (5h Cir.1988) and "Confused about CERCLA?" in the Reporter's Winter 1996 issue.) The Tanglewood East court warrants courts to apply liability to successor property owners: "¤9607(a)(1) applies to current owners of adulterated sites." Tanglewood East, 849 F.2d at 1572. Further, the court held that CERCLA shouldn't be interpreted as to "apply to only the person responsible for introducing the toxins . . . [we] do not share that crabbed a reading of this statute." Id.
Cheslik also suggests that when a contract is contingent upon another act, such as the sale of a buyer's present home, that contract should also specify a time limit for that act to occur. It should also specify when the earnest money will be returned to the buyer, should his present home not sell.
When a party to a sale is a corporation, a paralegal should check the state statutes to ensure the properly authorized person signs the contract, Cheslik warned. (In some states, the corporation's president must sign.) Documents to be recorded must contain an acknowledgement that the person is who he says he is, too.
Dealing with dates
Ask anyone--timing is of the essence when planning a real estate closing. According to Cheslik, these three timing issues need special attention:
- The closing date follows the possession date. Many times, for one or the other party's convenience, the closing and possession dates will not be the same. Of course, a closing date generally precedes a buyer's possession date. But sometimes, a buyer will move into a house before he has closed on it. A legal rep must then ensure that the buyer pays the seller rent by stipulating this--with the specific amount of rent per diem--in the final contract or in a separate lease agreement.
- The seller is building a new house. Although a seller's rep should set dates that allow the seller sufficient time to relocate before the buyer takes possession, this tactic becomes crucial here. If a seller must rent property while he waits for carpenters to finish his new home, a paralegal should try to plan dates that will allow the seller to rent temporary quarters for a standard lease period, so he won't be stuck paying rent six months after his house has been completed--or won't be without a roof above his head before his new house is habitable.
- Friday afternoon closing dates. Avoid, avoid, avoid, Cheslik warns. "Too many problems arise when a closing occurs Friday afternoon. A buyer's checks from a closing scheduled immediately before wouldn't have cleared. Plus, if someone delivers the deed, and the bank clearing the check defaults . . . well, you get the picture." So a paralegal should schedule a closing Monday through Thursday to be safe.
Learn about Mortgage Insurance on the Net
With more individuals closing with smaller downpayments, many lenders now require mortgage insurance. So when you're preparing a closing, check out the following Web sites for info about mortgage insurance:
- FHA mortgage insurance programs. HUD's Federal Housing Administration (FHA) offers a selection of single family mortgage insurances to enable persons to purchase homes. Reach it at http://www.hud.gov/ha/sfh/sfhdesc.html
- How mortgage insurance works. Discover everything you ever wanted to know about mortgage insurance at http://www.scruz.net/~tom/ne04011.htm
- Mortgage insurance: frequently asked questions at http://www.calmort.com/pmifaq.htm or at http://www.mtgloan.com/amerimac/ pmiqa.shtml
- Some mortgage borrowers can cancel their loan insurance at http://www.interest.com/sa960313.htm
- Avoid paying for mortgage insurance. Arnold King's column tries to counteract "dubious financial advice" at http://www.calmort.com/avoidpmi.htm
Use flags and labels to expedite a complex closing
The 1996 Paralegal of the Year Award winner Lois M. Lake summarized how she executed a multi-client closing for U S WEST, Inc. in the Reporter's Winter 1996 issue. Her technique was a paradigm of organization:
For this 17-buyer closing, Lake designated a specific color of folder for each buyer and his documents. Then she red-flagged each buyer's signature line, green-flagged each seller's signature line, yellow-flagged each notary signature line, and blue-flagged every third-party signature line.
Along with labeling every box about the documents enclosed, she prepared "Table Tags" that designated each buyer and seller at each table. She also instructed buyers and sellers to execute documents at one end of each table.
With Lake's organization, the 17 buyers executed more than 500 documents within five days.
For more information, read Lake's narrative in the Winter 1996 issue.
NPR Editor Lindsey Martin-Bowen has served full-time as a legal editor for the U.S. Interior Department, as a journalist/photographer for THE LOUISVILLE TIMES and THE SUN Newspapers, and as an associate editor for MODERN JEWELER Magazine. A Phi Kappa Phi member, she holds an M.A. degree in English/writing, has taught writing and literature at Johnson County and the Metropolitan Community Colleges, and is pursuing a Ph.D. at the University of Missouri-Kansas City. Each year since 1987, she had helped judge the international NEW LETTERS Literary Contest. Her biography appears in WHO'S WHO IN AMERICA (48th, 49th, 50th, and 51st editions), WHO'S WHO IN THE MIDWEST (22d, 23d, 24th, and 25th editions), and WHO'S WHO IN THE WORLD (10th, 11th, and 12th editions).
Cheslik, J.D., Julie M. (Interview). February 27, 1997.
Kurtz, Sheldon F., and Herbert Hovenkamp. American Property Law. 2d ed. St. Paul: West Publishing, 1993.
Makdisi, John. Estates in Land and Future Interests. 2d ed. Boston: Little, Brown and Company, 1995.
Verchick, J.D., Robert. Class notes from Professor Verchick's property classes, University of Missouri--Kansas City School of Law, Fall 1996-Spring 1997.
Wagner, J.D., Jeff. Class notes from Professor Wagner's real property class, Denver Paralegal Institute, October 1982.
Werner, Raymond J. Real Estate Closings. New York: Practising Law Institute, 1979