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Disclosures and Due Diligence in Residential Real Estate Transactions Scott M. Lucas & Matthew J. Pfohl Olson & Lucas, P.A.

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Presentation on theme: "Disclosures and Due Diligence in Residential Real Estate Transactions Scott M. Lucas & Matthew J. Pfohl Olson & Lucas, P.A."— Presentation transcript:

1 Disclosures and Due Diligence in Residential Real Estate Transactions Scott M. Lucas & Matthew J. Pfohl Olson & Lucas, P.A.

2 Introduction Disclosures to be made by Sellers – §20.2 Disclosures to be made by Sellers – §20.2 Disclosures to be made by Brokers & Agents - §20.3 Disclosures to be made by Brokers & Agents - §20.3 Due Diligence Concerns - §§20.4-20.9 Due Diligence Concerns - §§20.4-20.9 p. 20-1

3 §20.2 Seller Disclosures STATUTORY PROVISIONS STATUTORY PROVISIONS Minn. Stat. §§ 513.52 – 513.60 Minn. Stat. §§ 513.52 – 513.60 Practice Tip – Licensees shouldnt assist with form Practice Tip – Licensees shouldnt assist with form Excluded Transactions – Minn. Stat. § 513.54 Excluded Transactions – Minn. Stat. § 513.54 Pp. 20-1 & 20-2

4 What Seller MUST Disclose: Minn. Stat. § 513.55 Minn. Stat. § 513.55 All material facts of which the seller is aware that could adversely and significantly affect: All material facts of which the seller is aware that could adversely and significantly affect: An ordinary buyers use and enjoyment of the property, or: An ordinary buyers use and enjoyment of the property, or: Any intended use of the property of which the seller is aware Any intended use of the property of which the seller is aware Damage, physical defects, failing mechanical systems, water issues, construction mistakes Damage, physical defects, failing mechanical systems, water issues, construction mistakes P. 20-2

5 But…No liability if: Not within personal knowledge Not within personal knowledge Based entirely on information from qualified third party Based entirely on information from qualified third party Obtained only through inspection or observation of inaccessible parts of real estate or Obtained only through inspection or observation of inaccessible parts of real estate or Could only be discovered by person with expertise in science or trade beyond knowledge of Seller Could only be discovered by person with expertise in science or trade beyond knowledge of Seller Minn. Stat. § 513.57, subd. 1 Pp. 20-2 & 20-3

6 What does NOT need to be disclosed: If the occupant had AIDS or was HIV positive If the occupant had AIDS or was HIV positive If someone committed suicide or died there If someone committed suicide or died there Ghosts? Ghosts? Neighborhood adult family home or residential facility Neighborhood adult family home or residential facility Sex offenders Sex offenders P. 20-3

7 Contradictions Must Be Disclosed If Seller obtains a copy of a report and knows of any material facts that contradict the information, those facts must be disclosed. If Seller obtains a copy of a report and knows of any material facts that contradict the information, those facts must be disclosed. Buyers: Give sellers your report! Buyers: Give sellers your report! Sellers: Obtain your own report? Sellers: Obtain your own report? P. 20-4 P. 20-4

8 In the Event of Non-Disclosure Sale Not Invalidated – Seek Damages and other Equitable relief Sale Not Invalidated – Seek Damages and other Equitable relief Rescission is an equitable remedy Rescission is an equitable remedy p. 20-5

9 Statue of Limitations Minn. Stat. § 513.57, subd. 2: Commence action within two years after closing on the sale Minn. Stat. § 513.57, subd. 2: Commence action within two years after closing on the sale Look for arbitration provision Look for arbitration provision P. 20-5 P. 20-5

10 Relationship of Statute to Common Law Claims Per Minn. Stat. § 513.57, subd. 3: Common law claims are NOT PRECLUDED Negligent or Fraudulent Misrepresentation Negligent or Fraudulent Misrepresentation Minnesota Consumer Fraud Act Minnesota Consumer Fraud Act Estoppel, Unjust Enrichment, Breach of Warranty Estoppel, Unjust Enrichment, Breach of Warranty P. 20-5

11 Damages Proof of alleged Damages is Required Proof of alleged Damages is Required Out of Pocket Rule Out of Pocket Rule Not the cost to fix damages Not the cost to fix damages Rather, FMV with the problem vs. FMV without the problem Rather, FMV with the problem vs. FMV without the problem Difficult to Prove? Difficult to Prove? Not off the cuff Not off the cuff P. 20-6

12 Location of Wells / Washington County Special Construction Area Property within Washington County Property within Washington County Minn. Adm. Rules section 4725.3650 Minn. Adm. Rules section 4725.3650 Minn. Stat. section 103I.236 Minn. Stat. section 103I.236 Disclose wells even if served by municipal water Disclose wells even if served by municipal water P. 20-13

13 §20.3 Licensee Disclosures Generally Generally Brokers and Agents Brokers and Agents P. 20-16

14 Material Facts Concerning Condition of Property Applicable Transactions Applicable Transactions Certain Facts are Non-Material Certain Facts are Non-Material Information in Certain Written Reports Need Not be Disclosed Information in Certain Written Reports Need Not be Disclosed Disclosure Must be Made of Contradictions in Written Reports Disclosure Must be Made of Contradictions in Written Reports Liability for Non-Disclosure Liability for Non-Disclosure Pp. 20-20 to 20-22

15 §20.5 Due Diligence: Condition of the Property Property Inspections Property Inspections From Buyers perspective, advisable to include From Buyers perspective, advisable to include Forms: Forms: MSBA Form 18 MSBA Form 18 MAR Inspection Contingency Addendum MAR Inspection Contingency Addendum If issues discovered, parties must reach an agreement to address, or waive by a deadline If issues discovered, parties must reach an agreement to address, or waive by a deadline P. 20-30

16 ARRANGE INSPECTION QUICKLY. ARRANGE INSPECTION QUICKLY. Typically done on a short time frame. Typically done on a short time frame. Check the applicable deadlines right away. Check the applicable deadlines right away. Waived if not timely done. Waived if not timely done. P. 20-30

17 Government Mandated Inspections Local ordinances should be reviewed; some cities impose inspection requirements. Local ordinances should be reviewed; some cities impose inspection requirements. Some ordinances require immediate correction of hazardous conditions. Some ordinances require immediate correction of hazardous conditions. Many ordinances available on the Internet. Many ordinances available on the Internet. P. 20-31

18 Does Municipal Inspection Alter Seller Duty ? unclear whether Minnesotas Condition of the Property disclosure law... allows a municipal code inspection to serve as the third party inspection report. To conclude yes is a tenuous judgment. Todd J. Anlauf, Kimball Foster, and John D. Rice unclear whether Minnesotas Condition of the Property disclosure law... allows a municipal code inspection to serve as the third party inspection report. To conclude yes is a tenuous judgment. Todd J. Anlauf, Kimball Foster, and John D. Rice P. 20-31

19 Environmental Concerns Phase I Environmental Site Assessment. Phase I Environmental Site Assessment. Used if there are concerns about hazardous waste or other environmental issues. Used if there are concerns about hazardous waste or other environmental issues. May lead to environmental testing. May lead to environmental testing. Unusual for residential transactions. Unusual for residential transactions. P. 20-31

20 Environmental Concerns... Radon: Buyer can ask for testing. Radon: Buyer can ask for testing. Lead Paint: If the property was constructed before 1978, the Buyer is to have ten days to investigate the possibility of the presence of lead or lead paint. Lead Paint: If the property was constructed before 1978, the Buyer is to have ten days to investigate the possibility of the presence of lead or lead paint. P. 20-31, 32

21 § 20.6 Due Diligence: Title Objectives of Title Review Objectives of Title Review Seller to provide marketable title. Seller to provide marketable title. primary purpose of marketable title is to protect the purchaser from the burden of litigation that may be necessary to remove apparent or real defects in the title Glaser primary purpose of marketable title is to protect the purchaser from the burden of litigation that may be necessary to remove apparent or real defects in the title Glaser P. 20-32

22 Another part of the title review process... make sure the property to be purchased will be suitable for client needs. make sure the property to be purchased will be suitable for client needs. Buyers should also consider whether easements, restrictions, covenants, agreements and other matters of record would interfere with Buyers intended use of the property... Anlauf, Foster, Rice. Buyers should also consider whether easements, restrictions, covenants, agreements and other matters of record would interfere with Buyers intended use of the property... Anlauf, Foster, Rice. P. 20-32

23 EVIDENCE OF TITLE Seller furnishes either: Seller furnishes either: Updated abstract, or Updated abstract, or a commitment to provide an owners policy of title insurance. a commitment to provide an owners policy of title insurance. If there is any concern that Buyer will be called upon later to provide an abstract, Buyer should request updated abstract. If there is any concern that Buyer will be called upon later to provide an abstract, Buyer should request updated abstract. P. 20-32,33

24 Form of Title Commitment Conditions section: Lists conditions of coverage. Conditions section: Lists conditions of coverage. Schedule A describes the property, lists the owner, names the insureds, and states the dollar value of the coverage amounts. Schedule A describes the property, lists the owner, names the insureds, and states the dollar value of the coverage amounts. Schedule B-I states the requirements that the title insurer will impose to insure title. Schedule B-I states the requirements that the title insurer will impose to insure title. Schedule B-II states the exceptions from coverage. Schedule B-II states the exceptions from coverage. P. 20-33 P. 20-33

25 Making Title Objections Timing of Objections Timing of Objections MAR Form Purchase Agreement : MAR Form Purchase Agreement : Seller shall use Sellers best efforts to provide marketable title by the date of closing. Seller shall use Sellers best efforts to provide marketable title by the date of closing. P. 20-33

26 MSBA form : Specific timeframe. MSBA form : Specific timeframe. If an abstract is provided, Buyer has ten days to either make title objections, or order its own commitment for a title insurance policy. If an abstract is provided, Buyer has ten days to either make title objections, or order its own commitment for a title insurance policy. If Buyer receives a commitment, it has ten days from receipt of it to provide Seller with Buyers title objections. If Buyer receives a commitment, it has ten days from receipt of it to provide Seller with Buyers title objections. Objections not timely made are waived. Objections not timely made are waived. P. 20-33

27 Buyers Title Commitment Review Provide written objections to the seller or sellers counsel, and to the closing agent issuing the commitment. Provide written objections to the seller or sellers counsel, and to the closing agent issuing the commitment. Thoroughly review the commitment to determine which objections to make. Thoroughly review the commitment to determine which objections to make. See materials – P. 20-34. See materials – P. 20-34.

28 Standard exception in Schedule B-II for [a]ny... adverse circumstance affecting the Title that would be disclosed by an accurate and complete survey of the Land. Standard exception in Schedule B-II for [a]ny... adverse circumstance affecting the Title that would be disclosed by an accurate and complete survey of the Land. However, closing agents may delete that survey exception for residential properties upon request, if a visual inspection of the property is made, or if a plat drawing is obtained. However, closing agents may delete that survey exception for residential properties upon request, if a visual inspection of the property is made, or if a plat drawing is obtained. P. 20-34 PRACTICE TIP: DELETE THE SURVEY EXCEPTION.

29 § 20.7 DUE DILIGENCE: THE CLOSING PROCESS Closing Instructions Closing Instructions Certain protections in the ALTA form Closing Protection Letter, discussed below, are based on protecting the owner or mortgagee from the closing agents failure to follow written closing instructions. Certain protections in the ALTA form Closing Protection Letter, discussed below, are based on protecting the owner or mortgagee from the closing agents failure to follow written closing instructions. P. 20-36.

30 TIMING: ALTA Closing Protection Letter form requires that the binder or commitment for the issuance of a policy of title insurance... must have been received by you prior to the transmission of your final closing instructions. TIMING: ALTA Closing Protection Letter form requires that the binder or commitment for the issuance of a policy of title insurance... must have been received by you prior to the transmission of your final closing instructions. P. 20-36

31 The Closing Protection Letter Issued by the underwriter. Protects against: Issued by the underwriter. Protects against: Failure of the issuing agent or approved attorney to comply with your written closing instructions to the extent that they relate to... status of the title to said interest in land... Failure of the issuing agent or approved attorney to comply with your written closing instructions to the extent that they relate to... status of the title to said interest in land... Fraud or dishonesty of the issuing agent or approved attorney in handling the funds or documents in connection with such closings to the extent such fraud or dishonesty relates to the status of the title to said interest in land or to the validity, enforceability, and priority of the lien of said mortgage on said interest in land. P. 20-37 Fraud or dishonesty of the issuing agent or approved attorney in handling the funds or documents in connection with such closings to the extent such fraud or dishonesty relates to the status of the title to said interest in land or to the validity, enforceability, and priority of the lien of said mortgage on said interest in land. P. 20-37

32 A closing protection letter is typically issued by a title insurance underwriter [t]o verify the agent's authority to issue the underwriter's policies and to make the financial resources of the national title insurance underwriter available to indemnify lenders and purchasers for the local agent's errors or dishonesty with escrow or closing funds. New Freedom Mortgage Corp. v. Globe Mortg. Corp. 761 N.W.2d 832, 842 – 843 (Mich. Ct. App. 2008), (emphasis added), quoting 2 P ALOMAR, T ITLE I NSURANCE L AW, § 20:11. P. 20-38.


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