Disclosures and Due Diligence in Residential Real Estate Transactions

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 Brokers & Agents - §20.3 • Due Diligence Concerns - §§20.4-20.9 p. 20-1

3. §20.2 Seller Disclosures • STATUTORY PROVISIONS • Minn. Stat. §§ 513.52 – 513.60 • Practice Tip – Licensees shouldn’t assist with form • Excluded Transactions – Minn. Stat. § 513.54 Pp. 20-1 & 20-2

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

5. But…No liability if: • Not within “personal knowledge” • Based entirely on information from “qualified third party” • 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 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 someone committed suicide or died there • Ghosts? • Neighborhood adult family home or residential facility • 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. • Buyers: Give sellers your report! • Sellers: Obtain your own report? P. 20-4

8. In the Event of Non-Disclosure • Sale Not Invalidated – Seek Damages and other Equitable relief • 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 • Look for arbitration provision 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 • Minnesota Consumer Fraud Act • Estoppel, Unjust Enrichment, Breach of Warranty P. 20-5

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

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

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

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

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

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

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

18. Does Municipal Inspection Alter Seller Duty ? • “unclear whether Minnesota’s 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. • Used if there are concerns about hazardous waste or other environmental issues. • May lead to environmental testing. • Unusual for residential transactions. P. 20-31

20. Environmental Concerns . . . • 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. P. 20-31, 32

21. § 20.6 Due Diligence: Title • Objectives of Title Review • 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 P. 20-32

22. Another part of the title review process. . . • 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 Buyer’s intended use of the property . . .” Anlauf, Foster, Rice. P. 20-32

23. EVIDENCE OF TITLE • Seller furnishes either: • Updated abstract , or • a commitment to provide an owner’s 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. P. 20-32,33

24. Form of Title Commitment • 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 B-I states the requirements that the title insurer will impose to insure title. • Schedule B-II states the exceptions from coverage. • P. 20-33

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

26. 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 Buyer receives a commitment, it has ten days from receipt of it to provide Seller with Buyer’s title objections. • Objections not timely made are waived. P. 20-33

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

28. PRACTICE TIP: DELETE THE SURVEY EXCEPTION. • 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. P. 20-34

29. § 20.7 DUE DILIGENCE: THE CLOSING PROCESS • Closing Instructions • Certain protections in the ALTA form Closing Protection Letter, discussed below, are based on protecting the owner or mortgagee from the closing agent’s 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.” P. 20-36

31. The Closing Protection Letter • 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. . . ” • “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 Palomar, Title Insurance Law, § 20:11. P. 20-38.