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Weekly Q&As

Do I have a duty to verify the mental capacity of a potential client?

Release Date: 12/29/2015

QUESTION:  I was recently contacted by an individual who owns several properties. The owner asked me to list all of those properties for sale. Before I could prepare the necessary listing agreements, the owner's son called me. He told me that his mother was not mentally competent, and that social services had already been called in to evaluate her. This was a complete surprise to me as the property owner seemed to understand exactly what she was doing when I met with her. Do I now have a duty to verify this potential client's mental capacity before entering into a listing agreement with her?

ANSWER:  In the situation you have described, we do not believe that you have any obligation to hire a medical professional to evaluate the mental condition of your potential client. However, whenever a potential client's "legal capacity" is called into question, there are some principles to keep in mind, and some suggested steps to take, before you enter into an agency agreement.

Under North Carolina law, for any contract to be binding there must be a mutual agreement of two parties both of whom are in possession of "legal capacity". This issue comes up when a minor wishes to enter into a contract. Because persons under the age of 18 are said to lack legal capacity, they generally cannot enter into a valid contract. Similarly, a certain level of mental capacity is required in order to enter into a binding contract.

What is the standard? The North Carolina Court of Appeals has stated the following: "A person has mental capacity sufficient to contract if he knows what he is about, and the measure of (that) capacity is the ability to understand the nature of the act in which he is engaged and its scope and effect, or its nature and consequences, not that he should be able to act wisely or discreetly, nor to drive a good bargain, but that he should be in such possession of his faculties as to enable him to know at least what he is doing and to contract understandingly."

Chapter 35A of North Carolina's General Statutes establishes procedures that can be followed in order for a Court to determine a person's competence. Under that statute, a verified petition seeking adjudication of the incompetence of an adult may be filed with the clerk by any person, including any State or local human services agency.

Because your prospect's son has raised the issue of his mother's competency, you should ask him whether a court has determined his mother to be incompetent. If the answer is yes, ask for a copy of that determination, and then consider contacting the court-appointed guardian. In the absence of a determination of incompetency, you should arrange for a disinterested person to meet with you and your prospect to observe the prospect and (hopefully) verify your evaluation of her mental capacity. Together, you should consider the standard quoted above: does the prospect truly understand the nature of the listing agreements she is about to sign, and the obligations they will impose on her? If you both agree that the standard is satisfied, you can safely proceed with the listing agreements. Later, if you are questioned about your decision to move forward, it will be very helpful to have an independent third party to confirm your evaluation of the prospect's legal capacity.

 

NC REALTORS® provides articles on legal topics as a member service.  They are general statements of applicable legal and ethical principles for member education only.  They do not constitute legal advice.  The services of a private attorney should be sought for legal advice.

© Copyright  2015. North Carolina Association of REALTORS®, Inc.  Any unauthorized reproduction, use or distribution is prohibited.  NC REALTORS® Members may reproduce individual articles and distribute them to other members and their clients, provided they are reproduced in their entirety without any modification, including the NC REALTORS® logo, disclaimer and copyright notice. 

 

 

What happens to an “Expiration of Offer” provision when the offer is rejected?

Release Date: 01/06/2016

QUESTION: I received an Offer to Purchase and Contract on one of my listings from a buyer agent last Monday afternoon at 3 PM.  The Additional Provisions Addendum was attached to the Offer with the “Expiration of Offer” provision selected.  The time and date inserted in the blanks were 9 AM the next day, Tuesday.  

I called the buyer’s agent at 9:30 PM Monday evening and said that while the sellers appreciated the offer, it was unacceptable as written.  I told the agent that the sellers would seriously consider another offer with a   larger Due Diligence Fee and a shorter Due Diligence Period. 

The buyer agent said she would pass that along to her client but insisted that a contract had to be negotiated and signed by Tuesday morning at 9 AM in order to be valid.  I said that the Expiration of Offer provision was no longer valid since the sellers had rejected the buyer’s offer.  Who was right? 

ANSWER:  You were.  When you told the buyer’s agent that the offer was unacceptable to the sellers, that constituted a rejection of the buyer’s offer.  None of the terms of that offer remained on the table at that point, including the Expiration of Offer provision.  Of course, if the buyers chose to make another offer they could include another Expiration of Offer provision as a part of that offer if they wanted to. 

Another thing an agent who uses the Expiration of Offer provision needs to understand very clearly is that, as written, the provision requires acceptance of the offer, not just a response to it, by the date and time inserted in the blanks.  Let’s vary the facts of your situation just a bit to illustrate the importance of this fact.  Say you’d contacted the buyer’s agent Monday evening and told her that your sellers were very interested in the offer and that they were going to sleep on it.  Then let’s say the sellers called you Tuesday morning at 10 AM to tell you they’d signed the offer and you’d then communicated that right away to the buyer’s agent.  Is there a contract?  No.  Since the Expiration of Offer provision provided that the offer would expire unless unconditional acceptance was delivered to the buyer by 9 AM that morning, the buyer’s offer actually expired shortly before notice of it acceptance had been communicated.  And an offer that’s expired can’t be accepted. 

 

NC REALTORS® provides articles on legal topics as a member service.  They are general statements of applicable legal and ethical principles for member education only.  They do not constitute legal advice.  The services of a private attorney should be sought for legal advice.

© Copyright  2016. North Carolina Association of REALTORS®, Inc.  This article is intended solely for the benefit of NC REALTORS® members, who may reproduce and distribute it to other NC REALTORS® members and their clients, provided it is reproduced in its entirety without any change to its format or content, including  disclaimer and copyright notice, and provided that any such reproduction is not intended for monetary gain.  Any unauthorized reproduction, use or distribution is prohibited. 

TRID - Agent's duty to review Closing Disclosures

Release Date: 12/15/2015

QUESTION:  I represent a buyer. I have a closing scheduled later in the week. When I called the closing attorney to request copies of the Closing Disclosures for the buyer and seller, I was told that the attorney could not, or would not, share those documents with me. I am concerned that I may be subject to discipline if I don't review those documents. What should I do?

ANSWER:  We have heard similar complaints from many brokers since the new rules promulgated by the Consumer Financial Protection Bureau (the "CFPB") went into effect for loan applications received on or after October 3, 2015. Those rules are commonly known as the TILA/RESPA Integrated Disclosure (or "TRID") Rules.

Although the TRID Rules do not limit the sharing of the new Closing Disclosures, some lenders are taking the position that there is personally identifiable information in the Closing Disclosures and that, therefore, other federal laws prohibit the lender from sharing this information with third parties without the consent of the borrower. To address this concern, new authorization language was added to paragraph 6(d) and 8(b) of the Offer to Purchase and Contract (Standard Form 2-T). This language authorizes the Buyer's lender, the parties' real estate agent(s) and the closing attorney to provide both parties' Closing Disclosures, as well as the settlement statement and disbursement summary, to the parties and their real estate agent(s).

We have heard that some lenders do not consider the authorization language in Form 2-T to be sufficient and are instructing their closing attorneys not to send the Closing Disclosures to the parties' brokers. This creates a potential problem for brokers in North Carolina.

The Real Estate License Law states that a broker may be subject to discipline for "failing, at the time a sales transaction is consummated, to deliver to the broker's client a detailed and accurate closing statement."  G.S. 93A-6(a)(14) states that if a closing statement is prepared by an attorney, a broker may rely on the delivery of that statement. However, the broker "must review (that) statement for accuracy."

In their course materials for the 2015-2015 General Update class, the Real Estate Commission has acknowledged that a broker cannot review what he or she is not given. The course materials contain the following language: "[A] broker's duty to provide a party with a copy of the settlement statement is satisfied if the broker assures that the closing attorney-settlement agent has provided a copy of the Closing Disclosure to the party."

Our suggestion is that brokers should continue to request the Closing Disclosures from the closing attorney in every transaction. Brokers should be prepared to point out the express authorization language in paragraphs 6(d) and 8(b). If a closing attorney refuses to provide the Closing Disclosures, brokers should document their request for those disclosures, and insist that the attorney confirm in writing that the Closing Disclosures have been provided to the parties themselves.   

 

NC REALTORS® provides articles on legal topics as a member service.  They are general statements of applicable legal and ethical principles for member education only.  They do not constitute legal advice.  The services of a private attorney should be sought for legal advice.

© Copyright  2015. North Carolina Association of REALTORS®, Inc.  Any unauthorized reproduction, use or distribution is prohibited.  NC REALTORS® Members may reproduce individual articles and distribute them to other members and their clients, provided they are reproduced in their entirety without any modification, including the NC REALTORS® logo, disclaimer and copyright notice. 

When does a back-up contract become binding?

Release Date: 12/08/2015

QUESTION: We represent a seller who is under contract to sell her home. A buyer agent representing another buyer recently delivered an Offer to Purchase and Contract with a Back-Up Contract Addendum attached, along with checks for the Due Diligence Fee and Initial Earnest Money Deposit.  Our firm is named as the Escrow Agent.  The seller has accepted the second buyer’s offer and we communicated that to their agent. 

I have a couple of questions. First, is the Back-Up Contract a binding contract now or does it become binding only if and when the contract between the seller and the first buyer is terminated?  Two, what do we do with the DDF and Initial EMD checks? 

ANSWER: To answer your first question, the Back-Up Contract became binding when it had been signed by both parties and the seller’s acceptance was communicated to the buyer agent.  The parties’ respective obligations to complete the transaction are indeed contingent on the primary contract being terminated, but the existence of that contingency doesn’t mean that the Back-Up Contract isn’t a binding contract now.

To answer your second question, since the Back-Up Contract has become binding, the EMD should be deposited in your firm’s trust account no later than 3 days following the Effective Date of the Contract. On the other hand, the Real Estate Commission’s Rule on handling trust money (58A.0116(b)(4)) requires you to either deliver the Due Diligence Fee to the seller or return it to the buyer, according to the instructions of the buyer, no later than three business days after the Effective Date of the Contract.  Thus, you should contact the buyer agent for the “back-up” buyer and request instructions on what to do with the DDF check. 

Note that paragraph 9 of the Back-Up Contract Addendum provides that the DDF becomes due and payable within five days after the seller has notified the buyer under the Back-Up Contract that the Back-Up Contract has become primary.  It’s the Buyer’s choice, but presumably, he or she would prefer to have the DDF delivered to the Seller only if and when the Back-Up Contract becomes primary. If that’s the case, you need to return the DDF to the buyer agent right away in order to be in compliance with the Real Estate Commission’s Rule.

 

NC REALTORS® provides articles on legal topics as a member service.  They are general statements of applicable legal and ethical principles for member education only.  They do not constitute legal advice.  The services of a private attorney should be sought for legal advice.

© Copyright  2015. North Carolina Association of REALTORS®, Inc.  This article is intended solely for the benefit of NC REALTORS® members, who may reproduce and distribute it to other NC REALTORS® members and their clients, provided it is reproduced in its entirety without any change to its format or content, including  disclaimer and copyright notice, and provided that any such reproduction is not intended for monetary gain.  Any unauthorized reproduction, use or distribution is prohibited.

Buyer’s Due Diligence Rights if the Due Diligence Fee is Zero

Release Date: 12/01/2015

QUESTION: I represent a seller. I just received an Offer to Purchase and Contract on Standard Form 2-T. In paragraph 1(d), on the line designating the Due Diligence Fee, the buyer inserted a zero. In paragraph 1(j), where the Due Diligence Period is defined, the buyer inserted a date that would equate to a roughly a three week due diligence period. If my client signs the offer, will the buyer have waived any right to terminate the contract prior to the end of the due diligence period by failing to offer or pay a due diligence fee? 

ANSWER: We answered this question once before, shortly after the introduction of the "due diligence contract" in 2011. However, we continue to hear the question fairly frequently. Therefore, our answer bears repeating.

The answer is that a buyer does not waive any due diligence rights by failing to offer or pay a Due Diligence Fee. The Contract and the very way it is organized anticipates that a buyer will have the right to conduct due diligence, and to terminate the contact prior to the end of the due diligence period, whether or not a due diligence fee is paid.

Paragraph 1(i) of the Contract defines "Due Diligence Fee” as "[a] negotiated amount, if any, paid by Buyer to Seller with this Contract for Buyer's right to conduct Due Diligence during the Due Diligence Period." The last sentence of the definition reads: "Buyer and Seller each expressly waive any right that they may have to deny the right to conduct Due Diligence... based on the absence or alleged insufficiency of any Due Diligence Fee, it being the intent of the parties to create a legally binding contract for the purchase and sale of the Property without regard to the existence or amount of any Due Diligence Fee.”

If the parties to a Contract desire to limit or eliminate the buyer’s right to do due diligence and/or terminate the contract for any reason or no reason during the due diligence period, it would require either the use of a different form, or significant modifications to the Contract that should be handled by a North Carolina real property attorney.

NC REALTORS® provides articles on legal topics as a member service.  They are general statements of applicable legal and ethical principles for member education only.  They do not constitute legal advice.  The services of a private attorney should be sought for legal advice.

© Copyright  2015. North Carolina Association of REALTORS®, Inc.  Any unauthorized reproduction, use or distribution is prohibited.  NC REALTORS® Members may reproduce individual articles and distribute them to other members and their clients, provided they are reproduced in their entirety without any modification, including the NC REALTORS® logo, disclaimer and copyright notice. 

I’m representing a brother and sister who have inherited a condo from a parent who just passed away.  Aren’t the heirs of estate property exempt from the requirement to provide either the Residential Property and Owners’ Association Disclosure Statement or the Mineral and Oil and Gas Rights Mandatory Disclosure Statement to prospective buyers?