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Weekly Q&As

Is an existing lease binding on a buyer?

Release Date: 4/14/2015

QUESTION: I represent an investor buyer who just put a property under contract using the Offer to Purchase and Contract (form 2-T).  He’s paying cash and the Settlement is supposed to be in two weeks, which is just before the end of the month.  I just got a call from the listing agent and you won’t believe what he told me.  His seller had supposedly forgotten to tell the listing agent that he’d just signed a one-year rental contract for the property that begins the first of next month!  All I know is that nobody told us anything about any lease before the property went under contract. 

The listing agent seems to think it’s not that big a deal.  He says the lease agreement hasn’t been recorded and that as long as we close before the term of the lease begins next month, my buyer will not take title to the property subject to the lease.  Is that right? 

ANSWER: No.  First of all, leases of 3 years or less do not need to be recorded.  A lease of more than 3 years does need to be recorded to protect the tenant against purchasers and lien creditors of the landlord.  The real question here is whether the fact the tenant has not gone into possession yet makes any difference.  We don’t think it does in this particular situation.  A bona fide purchaser for value who has no notice of a tenancy would generally take title free and clear of the tenancy.  In such a situation, the tenant’s leasehold interest in the property would be destroyed and the tenant would only have a claim for damages against the landlord/seller.  However, if the tenant has recorded the lease or is in possession of the property, that is considered notice to the buyer whether the buyer actually knows about the lease or not.  It’s true that in your situation the tenant has neither recorded the lease nor entered into possession.  However, your buyer now has actual knowledge about the existence of the lease, so our view is that the buyer would take title to the property subject to the lease.

If the buyer doesn't want the property subject to the lease and the seller can’t arrange to buy the tenant out or relocate him, we think the seller would be in breach of contract due to his inability to convey “good title” to the property.  See paragraph 8(f) of the Contract.

NCAR 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.  If you or a client requires legal advice, the services of a private attorney should be sought.  Always consult your broker-in-charge when faced with a question relating to the practice of real estate brokerage.

© Copyright  2015. North Carolina Association of REALTORS®, Inc. All rights reserved. No reproduction of any part may be made without the prior written consent of the copyright holder. Any unauthorized reproduction, use, disclosure or distribution is strictly prohibited.

 

 

Is it legal to charge a cleaning fee in a residential lease?

Release Date: 4/7/2015

QUESTION:   I attended a continuing education class recently on the subject of property management. The instructor mentioned that property managers may not require full deep cleans and professional carpet cleans in a lease. He also mentioned that property managers may not deduct the costs of those types of services from the tenant's security deposit in the event the tenant fails to fully clean the premises when the lease ends. My firm attaches an addendum to all of our residential leases which requires a pre-paid cleaning fee, and states that the fee will be added to the tenant's security deposit. Are our procedures legal?

ANSWER:   Not completely. On the positive side, we do not see any problem with a lease provision that requires tenants to clean the leased premises, including the carpets, at the termination of the lease term. NCAR's standard Residential Rental Contract (form 410-T) already includes a similar requirement. Paragraph 16 of that form sets forth "Tenant's Duties Upon Termination". One of those enumerated duties is to "properly sweep and clean the Premises, including plumbing fixtures, refrigerators, stoves and sinks". Attaching an addendum that increases the tenant's cleaning obligations is perfectly legal.

Also on the positive side, we do not see a problem with charging the tenant a fee, in advance, for cleaning the leased premises. In 2012, the Vacation Rental Act was amended to specifically authorize such fees in the context of vacation rentals. Section 42A-17(d) of the Act states: "A vacation rental agreement may include a cleaning fee, the amount of which shall be provided in the agreement, reasonably calculated to cover the costs of cleaning the residential property upon the termination of the tenancy." While there is no similar provision in the Residential Rental Agreements Act (which governs non-vacation tenancies), there is also no prohibition against charging cleaning fees in that statute. We would recommend that any such fee also be " reasonably calculated to cover the costs of cleaning the residential property upon the termination of the tenancy."

What is not permitted is using the tenant's security deposit to pay for routine cleaning of leased premises. Section 42-52 of the Tenant Security Deposit Act states: “The landlord may not withhold as damages part of the security deposit for conditions that are due to normal wear and tear nor may the landlord retain an amount from the security deposit which exceeds his actual damages.” In 2010, in an article published in the Real Estate Bulletin, one of the Real Estate Commission's staff attorneys clarified the meaning of that provision: "(a landlord) may assess a “cleaning fee” against the deposit only in those cases where the tenant has left the premises “filthy” thereby causing damage to the premises. Costs incurred for routine cleaning cannot be charged against the deposit because they are considered part of the normal wear and tear of the premises.”

NCAR 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.  If you or a client requires legal advice, the services of a private attorney should be sought.  Always consult your broker-in-charge when faced with a question relating to the practice of real estate brokerage.

© Copyright  2015. North Carolina Association of REALTORS®, Inc. All rights reserved. No reproduction of any part may be made without the prior written consent of the copyright holder. Any unauthorized reproduction, use, disclosure or distribution is strictly prohibited.

 

 

Occupancy standards and the Fair Housing laws

Release Date: 3/31/2015

QUESTION: I am a buyer’s agent.  My clients are a husband and wife with 3 children, ages 5, 3 and 1.  I showed them a two-bedroom townhome they really like, and I helped them get it under contract.  Now, they are being told that the owners association has a rule limiting occupancy to two persons per bedroom and that it would be a violation of that rule for a family of five to live in the townhome.  Is that legal?

ANSWER: Fair Housing laws prohibit discrimination in any aspect of the sale, rental, financing or advertising of dwellings on the basis of race, color, religion, national origin, sex or familial status (the presence of children in the family).  According to the so-called “Keating Memo,” issued in 1991 by the General Counsel of the US Department of Housing and Urban Development (HUD), an occupancy policy of two persons in a bedroom, as a general rule, is reasonable under the Fair Housing Act. 

However, the Memo goes on to state that in connection with a complaint alleging discrimination on the basis of familial status, HUD will carefully examine any nongovernmental restriction to determine whether it operates unreasonably to limit or exclude families with children.  In reviewing such a case, HUD will consider the size and number of bedrooms, configuration of the dwelling, the age of the children, and other factors, such as the capacity of the septic, sewer and other building systems and state or local governmental occupancy requirements. The Memo sets forth several hypothetical situations that illustrate how some of these factors may be applied.

What this means in your situation is that a charge of discrimination on the basis of familial status could possibly be warranted if the owners association seeks to either stop the sale or enforce its “two-per-bedroom” rule against the family and a determination is made based on the factors set forth above that the townhome could reasonably accommodate the family. 

You should suggest that the buyers seek legal counsel to advise them of their rights in this situation. They might also consider contacting the NC Human Relations Commission, which investigates complaints of unlawful discrimination in North Carolina.

NCAR 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.  If you or a client requires legal advice, the services of a private attorney should be sought.  Always consult your broker-in-charge when faced with a question relating to the practice of real estate brokerage.

© Copyright  2015. North Carolina Association of REALTORS®, Inc. All rights reserved. No reproduction of any part may be made without the prior written consent of the copyright holder. Any unauthorized reproduction, use, disclosure or distribution is strictly prohibited.

 

 

Duty to investigate and disclose "completed" repairs

Release Date: 3/24/2015

QUESTION:  The most recent issue of the Real Estate Bulletin describes a case where a listing agent was disciplined for failing to disclose problems associated with the home's foundation. Shortly after closing, the buyers discovered that cracks were forming on the home's ceilings, molding was separating, and windows and doors were not closing properly. The buyers then discovered that at some point prior to listing the home, the sellers had hired a masonry company to jack up the house and repair the foundation. After the buyers filed a complaint with the Real Estate Commission, the listing agent initially stated that he had no knowledge of any foundation issues with the home. He noted that the sellers had completed a Residential Property Disclosure Statement and answered "no" to the questions about knowledge of foundation problems and structural changes to the property. However, when interviewed, the sellers stated that they had spoken to their agent "in general terms" about the foundation repairs and that he "did not make any further inquiries into these repairs". In view of the fact that repairs to the foundation had been completed prior to the home being listed, what did the listing agent do wrong to deserve the discipline he received?

ANSWER:   From the facts presented,  what seems clear is that whatever foundation repairs were completed prior to the sellers listing their home for sale, those repairs did not completely solve the home's foundation problems. The issue presented by these facts is whether the listing agent should have ascertained that fact, and disclosed it to potential buyers.

The Real Estate Commission has consistently taken the position that licensed agents must disclose not only the material facts they know but also the material facts they reasonably should have known. If the agent is given information about a prior problem, and can reasonably conclude that the source of the problem has been identified and satisfactorily repaired, and that any damage caused by the problem has been satisfactorily repaired, then the agent would not be required to disclose any facts about the problem. In essence, a fully repaired "problem" is no longer a material fact.

What the recent disciplinary case teaches us is that where an allegedly repaired problem is significant enough in scope, it is not sufficient for an agent to merely ask his client if the problem has been repaired. The agent can't put his head in the sand when he or she hears the word "repaired"; circumstances may impose a duty on the agent to inquire further. The scope of the inquiry required is difficult to define. It is safe to say that the more significant the allegedly repaired problem, and the more recent the repair, the greater the obligation to inquire and investigate. Appropriate inquiry/investigation could include requesting appropriate documentation from the contractor who performed the repairs, and perhaps even a telephone conversation with that contractor. Obtaining an opinion from a qualified contractor that the repairs are indeed complete would also be sufficient. Agents who conduct this type of inquiry and then document their actions will reduce or eliminate the risk of discipline. 

NCAR 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.  If you or a client requires legal advice, the services of a private attorney should be sought.  Always consult your broker-in-charge when faced with a question relating to the practice of real estate brokerage.

© Copyright  2015. North Carolina Association of REALTORS®, Inc. All rights reserved. No reproduction of any part may be made without the prior written consent of the copyright holder. Any unauthorized reproduction, use, disclosure or distribution is strictly prohibited.

 

 

Can my firm disburse an earnest money deposit without the written consent of both parties?

 
Release Date: 3/10/2015

QUESTION:  I am the Broker-in-Charge for my firm. We represent a buyer in a transaction and my firm agreed to serve as the escrow agent. Our client paid a due diligence fee to the seller and deposited $5,000.00 in earnest money with our firm (the "EMD"). Several weeks ago, and during the due diligence period, our client decided to terminate the contract. We immediately delivered the standard Termination Notice (form 350-T) to the listing agent and we asked him to have the seller sign page 2 of the Notice to acknowledge that our client is entitled to a refund of the EMD. So far, despite a follow-up request, we have not received a signed acknowledgement. Our buyer-client wants to put an offer on another house but she needs her $5,000.00 EMD to use as a deposit on the new home. The seller has not disputed our client's entitlement to the EMD. Can we disburse the EMD without something in writing from the seller?

ANSWER:  The answer to your question is yes. However, our strong recommendation is that, even in the absence of an actual dispute, an escrow agent should always attempt to obtain written consent from both parties to a terminated transaction before disbursing an EMD to either party.

If either party disputes the other's entitlement to the EMD, even if the dispute has no basis, your firm's duty as an escrow agent is clear. As is noted in both paragraph 1(f) of the Offer to Purchase and Contract (form 2-T) and on page two of form 350-T, a broker-escrow agent is required to retain the money in its trust account until (a) a written release from the parties is obtained, (b) disbursement is ordered by a court, or (c) the funds are deposited with the clerk of court in accordance with the provisions of N.C.G.S. §93A-12.

What if there is no dispute but one party is totally silent when the other party requests disbursement of an EMD? Rule A.0116(e) of the Real Estate Commission Rules (the rule entitled "Handling of Trust Money") states that, except for transfers of an EMD to a closing attorney or other settlement agent, "A broker shall not disburse prior to settlement any earnest money in his or her possession for any other purpose without the written consent of the parties." The legal staff at the Real Estate Commission interprets the written consent language in A.0116(e) to apply only to ongoing transactions. In the context of a terminated transaction, the Real Estate Commission’s legal staff has opined that “written agreement by both parties is the safest course and, where possible, the best process. However… (we) would not discipline a licensee who disburses an EMD from a terminated transaction so long as he (or she) has no evidence of a dispute and has attempted to obtain written consent. As always, we would tell a licensee to document, document, document such attempts.”

NCAR 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.  If you or a client requires legal advice, the services of a private attorney should be sought.  Always consult your broker-in-charge when faced with a question relating to the practice of real estate brokerage.

© Copyright  2015. North Carolina Association of REALTORS®, Inc. All rights reserved. No reproduction of any part may be made without the prior written consent of the copyright holder. Any unauthorized reproduction, use, disclosure or distribution is strictly prohibited.