Big Mistake #17: Failing to Understand the Settlement Provisions in the Purchase Contract
Selecting the Settlement Agent. As a matter of custom, the purchaser normally selects the settlement agent. Where the allocation of discretionary charges by the chosen settlement agent is known to be unreasonable or where the office of the settlement agent is inconvenient to the seller, disagreements will occasionally arise. However, due to the large number of possible settlement agents and locations, the buyer and seller can usually reach some accommodation that is satisfactory to them and the real estate agent(s) involved.
As noted in the discussion of Big Mistake #21, there is no legal requirement that a settlement must be processed or conducted by an attorney. If a purchaser shops around, it may be possible to find a nonlawyer settlement agent that will perform the settlement for little or no cost to the purchaser so that the purchaser may be able to hire her own attorney to represent her own separate interests at the settlement but also save money, overall, by using a nonlawyer settlement agent.
In any event, the purchaser is well advised to have her own independent attorney representing her own individual interests at the settlement, whether or not that attorney actually prepares and conducts the settlement.
Selecting the Settlement Date. The typical purchase contract also provides a blank for inserting the estimated settlement date. If the purchaser wants to have the option of settling earlier or later than that date, the contract should specify that.
Court decisions concerning the strict enforceability of the settlement date specified in a contract are not completely reliable predictors of what any given court would do in a situation where the contract does not make it crystal clear that the single date agreed upon is the only date that is acceptable.
As a general proposition, a court is more likely to enforce settlement on a date reasonably close to the agreed upon date if the contract states that “time is of the essence” with respect to that settlement date. However, even such a provision does not guarantee that the date specified in the contract cannot slip at all. Basically, the “time is of the essence” clause simply tightens up the period of allowable slippage. If it is absolutely essential that your settlement occur no later than a certain date, make sure that the contract specifically says that.
Consequences of Failing to Settle on Time. The contract should state what happens if the settlement does not occur on or before the date specified. For example, can either the buyer or the seller extend the time for settlement by paying a per diem amount for an additional 30 or 60 day delay? Is the contract automatically terminated? Or does the non-defaulting party have the option of declaring the contract terminated and claiming damages? The final contract accepted by buyers and sellers usually fails to address these alternatives adequately.
Allocation of “Settlement Costs”. Be careful of contract provisions that say that the seller will pay up to a certain dollar amount of purchaser’s “closing costs” or “settlement costs”. These phrases mean different things to different people. For example, do they include points paid to the lender? Pre-paid interest? Items paid outside of closing but reflected on the settlement sheet? It is always best to make the terms of the contract specific. For example, if it is intended that the seller will pay only certain specific settlement items such as the settlement fee charged to the purchaser and the recording charges otherwise payable by the purchaser, the contract should state specifically which items the seller is agreeing to pay for on behalf of the buyer.
On the other hand, if the intention is to give the purchaser a certain dollar amount of credit, then the provisions should be drafted more generically to say that the seller will pay a certain dollar amount of the “total fees, costs or other charges otherwise payable by the purchaser at settlement”.
In any event, the purchaser needs to make sure that there will be sufficient charges assessable to the purchaser at settlement in order to use up the entire credit given.
Big Mistake #21: Failing to Obtain Adequate Representation for Settlement
Settlement Processing. This Chart shows the typical actors, documents and document flows involved in processing the typical residential real estate transaction from contract through settlement. The typical parties and entities involved are identified in the boxes in the first and last columns. The second column identifies the typical documentation normally required for a settlement.
The “Occasional Special Requirements” listed in the third column are documents that are occasionally required before a settlement can be held. It is especially important for real estate agents and others involved in pre-settlement activities to be able to identify the special situations in which these documents will be required because, although they occur only occasionally, when they do occur, the settlement cannot go forward without the required documents. Since it may require a significant amount of lead time to obtain some of these documents, if it is not known until the day of settlement that they will be required, it may cause an embarrassing and expensive settlement delay for everyone involved.
The documents that are typically prepared by the settlement agent are identified in the fourth column. The flow of the documents to and from the settlement office are indicated by the arrows in the chart.
Everyone involved in a settlement needs to understand what documents are required where and when so that the settlement can proceed smoothly at the appointed time.
Who Represents the Purchaser at Settlement? A purchaser is not required to have his or her own lawyer for settlement, but it is a Big Mistake not to have one. If the settlement attorney or settlement agent is selected by the seller, whose interests do you think that settlement agent or settlement attorney is going to represent at settlement?
In any event, if the settlement agent is not an attorney, the agent is prohibited by law from giving you any legal advice. In such a case, who will represent your interests?
Sometimes, an attorney may be selected for settlement but the attorney considers himself to be merely an “escrow agent.” In other words, the settlement attorney contends that he does not represent either the buyer or the seller, especially where there is any conflict between them. In such a case, again, who represents the interests of the purchaser?
In all cases, the buyer needs legal representation by his own attorney who is looking out for his interests and his interests only at the time of settlement. As a buyer, you need to have a knowledgeable attorney reviewing the settlement documents to determine whether or not they are legally sufficient and legally appropriate for your particular needs in your particular situation.
For example, should anyone else in addition to you be on the title to the property? If so, how should you take title? Where there are joint owners, should the survivor take title free and clear of the claims of any heirs of the deceased owner? Are there any estate or inheritance tax issues that may affect your choice of how you wish to take title? What instructions should you give to the settlement agent before settlement to insure the maximum deductibility, for federal and state income tax purposes, of your settlement costs?
Even if you have not had the benefit of competent legal advice at the time you entered into the contract, you need competent legal advice at settlement to make sure that the terms of the contract have been satisfied and that you are, in fact and in law, getting what you are entitled to receive.
Your attorney can also see to the proper allocation of settlement costs and charges and she can explain to you any title objections or defects (such as easements or encroachments or violations of building restriction lines) that may be revealed by a knowledgeable review of the title abstract and the survey. In addition, your attorney can review the title binder to make sure that your final title insurance policy will be sufficiently comprehensive and will not have exclusions or exceptions from coverage which might expose you to major losses from title defects.
Finally, without your own attorney there to represent your interests at settlement, what do you do if an unexpected problem arises and you don’t know what your rights are or what you should do? No one but an experienced real estate attorney hired by you to represent your interests exclusively can provide the kind of protection that you need at settlement.