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May 2014

Disputes Over Disclosures, Boundaries and Earnest Money

Provide Fodder for REALTORS® Annual Battle of the Barristers

By NWREporter

May 2014

Barristers
Top: Annie Fitzsimmons, Mike Spence, Doug Tingvall
Bottom: Chris Osborn, Lars Neste

More than 200 REALTORS® and affiliate members of SEATTLE KingCounty REALTORS® gathered in Bellevue in March for the annual "Battle of the Barristers" clock-hour program and fund-raiser. Five attorneys whose practices focus on real estate law debated the merits of four legal cases.

Billed as "the most informative and entertaining real estate legal event of the year," the popular program covered myriad thorny issues while promoting best practices involving specific performance to disclosure law and earnest money disputes. The final case covered Form 34 (blank addendum), which moderator Mike Spence quipped is "the one that will get my kid through college."

Proceeds from the event benefit the Seattle First Citizen Scholarship Foundation.

Joining Spence were four attorneys who all teach clock-hour classes for industry professionals:

  • Annie Fitzsimmons, attorney for Washington REALTORS┬« (WR) and its hotline;
  • Lars Neste, a shareholder at Demco Law Firm, P.S., where he specializes in real estate law;
  • Chris Osborn, from Foster Pepper, PLLC, residential and commercial real estate law specialists; and
  • Doug S. Tingvall, an attorney with 30-plus years of experience representing residential real estate professionals.

To open the "Battle," Spence, an attorney at Helsell Fetterman LLC and a licensed real estate instructor, outlined a case emanating from an addendum and a series of electronic transmissions -- with each subsequent one having diminished legibility.

Mike Spence
Attorney, Mike Spence, Moderator

Annie Fitzsimmons, attorney at WR, reminded the audience that buyer's acceptance requires delivery, and prior arrangements must be made to use e-signatures. Also, she emphasized, if items are added, make sure there is an understanding of requirements for all parties to sign - and "don't transmit illegible forms!"

History shows uncertainties surrounding the legibility of transmissions and related matters are usually resolved in favor of sellers, Tingvall reported. Osborn, who serves as outside counsel to Northwest Multiple Listing Service, commented these types of cases won't be won on summary judgment. "Everyone will be broke by then," he stated.

Also, in response to a question on whether initials on documents are acceptable, Osborn said yes, "if that's your practice - but be consistent." But Neste cautioned against initialing changes in multiple offers situations, explaining it could be risky.

Scenario #2 focused on constructive notice and disclosure of material defects. It was based on a case involving a broker who was selling her condo. That broker was also president of the board for her condo's homeowner association, a fact that was disclosed in board meeting minutes that both parties had. She had not disclosed to buyer that she was a licensed broker.

Meeting minutes indicated repairs for moisture damage in her condo had been authorized by the board. At issue was a seller's duty to disclose material defects that the seller has "actual knowledge of" and the overlap with the buyer's common law duty to investigate to discover the extent of the problem.

As the attorneys and handout materials noted, a seller is also required to either amend Form 17 or correct defects after an initial Disclosure Statement was issued.

Citing case law, attorneys reminded Realtors who represent buyers to be diligent in investigating once notified of a potential problem. At the same time, Form 35 (inspection addendum and response) doesn't allow for intrusive inspection.

Realtors should be wary of buyers who don't act on information, or who waive inspections. "I'd get another buyer," one speaker suggested.

Acknowledging confusion about each party's duties based on decisions in recent cases, Spence, the moderator, asked the audience, "how many of you are going to quit being buyers' agents?!"

The third scenario, dubbed "the ungrateful buyer," involved the sale of an older house with oil heat. Five days before closing, the furnace failed, and the seller replaced it with gas. Upon learning this, the buyer refused to close, and a dispute over who gets the earnest money ensued. (Tingvall's answer: the lawyers!)

The four attorneys discussed and debated such questions as: is it a material breach? Doesn't seller have a duty to deliver a functional oil furnace? And what does it mean if buyer fails to respond?

Neste said litigating is a bad idea when assumptions are made. Spence agreed, saying interpleader action is "not a good process to go through." Instead, he suggested mediation or arbitration be considered as quicker, less expensive ways to settle in cases involving relatively small earnest money disputes.

Osborn said reforms on handling earnest moneys may be needed as one way to avoid such disputes. Whether (or when) a legislative solution is possible is unclear. Tingvall suggested the only real way to eliminate disputes over earnest money is to eliminate earnest money.

As noted in the handout, how earnest money is to be handled in a transaction is largely a matter of the contract. Deposits of up to 5 percent of the purchase price are subject to the safe harbor provisions of state statutes.

The final case scenario involved property that was subdivided into front and rear lots, with parking spaces in rear provided to owners of the front lot, an accommodation that is contrary to code. Attorneys agreed the status of boundaries is uncertain in many transactions.

One of the brokers in this particular case prepared a Form 34 to provide the parking places (with provisions to swap parking places at closing), an agreement Spence described as "careless." Fitzsimmons concurred, saying "an agreement to agree is unenforceable."

Following discussions of the case studies, the attorneys responded to audience questions and comments. Several questions centered on evolving uses of technology, including one situation where a "nanny cam" was being used in a vacant house to capture comments as brokers showed the listing, and whether doing so violated recordings of private conversations.

The attorneys cautioned audience members to use restraint during conversations in a seller's home.

Other "mishaps" were reported involving inadvertent use of "reply all" in emails and revealing presumably private comments and changes using the "tracking changes" tool in a Word document. In that case, a comment was made about a willingness to pay full price. That unintended disclosure cost $500,000.

In discussing the cases, the attorneys emphasized the importance of complying with agency duty and not straying into the unauthorized practice of law.  It's appropriate to give guidance, Neste said, but buyers or sellers should confer with their own attorneys or other experts.

"It's up to you to safeguard your client's confidences," Fitzsimmons told the audience.

"Don't have a lawsuit named after you," was Neste's final piece of advice.