Residential Real Estate Transactions

I - INTRODUCTION

A. FAR/BAR vs. Other Contrcts

Twenty-five years ago, lawyers held to the belief that each real estate transaction was "different enough" so that no standard form of contract would suffice. Notwithstanding the foregoing, however, most attorneys utilized a "boiler plate" or "in house" contract which they modified for each transaction. At the same time, lawyers were being asked to close or otherwise provide advice with respect to contracts that were being prepared by each real estate brokerage office, many of which were wholly inadequate. At the time, the Florida Association of Realtors believed that a uniform contact would benefit their members by (i) standardizing the rights and responsibilities of the parties; (ii) avoiding wholesale revisions to contracts prepared by their members by attorneys for the parties; and (iii) allowing them to provide input into the form of the document by joint committee. As a result, a committee of the Real Property, Probate and Trust Law section of the Florida Bar met with representatives of the Florida Association of Realtors and they hammered out, after extensive negotiations, the first version of the FAR/BAR Contract (hereinafter, the "contract"). Although not an immediate success, the objectives of the contract were met and the form progressively became the most popular form of contract used throughout the state for residential real estate transactions. Beginning in the mid-90's, the Florida Association of Relators became disenchanted with several aspects of the then existing mechanism for producing the contract, i.e., (a) the Bar’s committee structure took too long to revise, incorporate and circulate what were deemed to be appropriate revisions; (b) the BAR side of the committee could not agree to a number of modifications desired by the Realtors; and (c) FAR now had an in-house counsel with the ability to produce and circulate a form that was ideal for its purposes. Out of this disenchantment arose the FAR form of contract, together with its collection of riders. Because the principal proponents of the FAR form of contract were the large, multi-state brokerages, they quickly required use of the FAR form by their sales associates and the popularity of the FAR form increased accordingly. Both form of contracts became available on CD Rom, with no ability to modify the basic language, but only to "fill in the blanks." However, the absence of a single, dominant form has resulted in various real estate brokerages modifying the FAR contract and we have now come full circle during the last twenty years.

B. Advantages.

Throughout this period, the contract has survived, prospered, and had been modified when deemed required. Throughout this period, the contract has also adhered to the principles of balancing the rights of the parties to the transactions and resisted many but not all (a broker was named a party for the purposes of attorney’s fees pursuant to a change to Standard R) changes that would primarily benefit brokers. The contract continues to (1) have the credibility of The Florida Bar behind it; (2) facilitate the review of contracts by attorneys, thereby reducing transactional attorney’s fees; and (3) provide a standard that has actually become the standard. Today, as opposed to fifteen years ago, attorneys rarely prepare addenda changing the significant terms of the contract, although special clauses and non-standard provisions are still often the subject of a rider or addendum. In retrospect, the BAR probably served the public well by avoiding truly horrible contracts, but, in so doing, it may have made it more likely that attorneys would not be involved in transactions because real estate brokers could now offer them a "Bar-approved" form. In this regard, however, the following clause appears right above the signature line on the contract: "THIS IS INTENDED TO BE A LEGALLY BINDING CONTRACT. IF NOT FULLY UNDERSTOOD, SEEK THE ADVISE OF AN ATTORNEY PRIOR TO SIGNING. THIS FORM HAS BEEN APPROVED BY THE FLORIDA ASSOCIATION OF REALTORS® AND THE FLORIDA BAR. Approval does not constitute an opinion that any of the terms and conditions in this Contract should be accepted by the parties in a particular transaction. Terms and conditions should be negotiated based upon their respective interests, objectives and bargaining positions of all interested persons."

II. CONTRACT

To state the obvious, the seller should be the party(s) currently owning the Property. Listing agents do not always verify this. A cross-check of the (many counties are on-line) records of the tax assessor would be appropriate at this point. The proper name of any entity or trust should also be clearly specified. If an entity of trust, evidence that the trustee or other party signing has the authority to sign should be verified. A cross-check of the corporate records of the Department of State would be appropriate in the case of entities. The name of the Buyer should be correctly spelled. Both Seller and Buyer are defined in the singular, although the parties may be multiple in each instance.

B. Description of Property.

In order to be binding, the contract must sufficiently identify the Property in order to distinguish it from any other property. Although the address of the Property is most likely sufficient, again, a check of the property records could identify a plat book and page and/or the Property Control Number, which would eliminate any possible doubt. Personal Property now includes a specific list of items to be conveyed unless specifically excluded. The list does not include a washer and dryer, which are commonly intended by the parties to be included. Other items that are commonly included would be (i) pool equipment; (ii) portable outbuildings; (iii) fountains; (iv) sconces; (v) built-in home theaters; and (vi) window air conditioning units. If not specified, a "fixture" is generally included within the definition of Real Property. Although not susceptible to any single, infallible, definition, generally speaking, a "fixture" is an item that has been permanently affixed to the real estate so that it cannot be removed without some effort at disconnection, with possible damage to the real estate. A bookcase can be either built in or movable, depending upon its character and means of attachment. The same can be said for audio/visual equipment and chandeliers. If given the time to do so, it is best to ask your client if there is anything specific that they want to have included or excluded and to go over with him the concept of fixtures.

In Florida, the Buyer typically submits the contract in the form of a signed offer to the Seller specifying a Purchase Price (and other terms) that the Buyer is willing to pay for the property. The Purchase Price is often negotiated by counter-offer. Although brokers would tell you that it is generally easiest to exchange faxes back and forth with offers and counteroffers lined through and initialed, it is obvious that such a process can result in illegible contracts. Therefore, a preferred method is simply to exchange a rider changing the Purchase Price and other monetary items in Section II of the contract. Deposits are usually made in two stages. The first deposit is customarily several thousand dollars made upon submission of the offer and then an additional deposit is made after acceptance of the contract, thereby creating the Effective Date. If there is a standard amount of deposit, it is 10% of the Purchase Price, but, a smaller number is not unusual for both low Purchase Prices and high Purchase Prices. If new mortgage financing is going to be obtained, then Section II(d) must specify the desired amount, which should be consistent with the amount specified in Section IV(b). If the Seller is going to provide financing, Section IV(a) and Standards B and K will apply. Finally, check the math in Section II(e) so that sections (a) through (d) will total the top line/Purchase Price.

The offers and counter-offers become a contract once the terms are agreed upon and (i) the offer is executed and delivered by all of the parties, or (ii) the fact of execution is communicated in writing between the parties. Florida follows the Statute of Frauds; oral contracts to sell real estate are not enforceable. Acceptance must occur on or before the date set forth in Section III(a), as may be modified by the two-day counter-offer provision if Section III(a) is left blank. The counter-offer provision is a recent addition to the contract resulting from the fact that the parties exchanging offers and counteroffers would sometimes forget to change the Effective Date and the final version of the contract would be executed after the time period allowed for its acceptance, thereby creating an enforceability issue, if nothing more.

Obviously, a contract that is not contingent upon financing is more acceptable to the Seller. Some Sellers, including some that have been "stung" before, will not accept a financing contingency. However, for most Buyers, a financing contingency is a necessity. Section IV(b) now provides that the financing contingency is to obtain "Loan Approval." This is because banks very rarely issue loan commitments anymore, which was the standard under the prior version of the financing contingency provision. The period to be specified for obtaining Loan Approval should be sufficient for that purpose. Rarely is such approval obtainable in less than 14 days; more than 30 days is usually too long to keep the property off the market. "Pre-approvals" are of little value, although Buyers sometimes utilize them to induce Sellers to accept the financing contingency in a contract. As far as the rest of the blanks are concerned, the idea behind the contingency provision is to recognize that the Buyer has a limited amount of funds and cannot pay more than "x" dollars in equity and closing costs and more than "y" dollars per month for housing. Therefore, the Buyer cannot close unless he obtains a loan within the amounts specified. Therefore, inserting the word "prevailing" for the percentage rate and origination fees does not serve the needs of the Buyer. Generally speaking, a loan in the amount of 80% of the Purchase Price is desirable for the Buyer because the Buyer can avoid paying PMI (mortgage insurance) and is desirable for the Seller because it is often easier to obtain than a higher loan to value ratio. Bear in mind that the lender is only going to lend the requisite percentage (80%, 90% or 95%) of the lower of the Purchase Price and the appraised value. If the gap between the Purchase Price and the amount financed is too large, then most Buyers will not be able to make up the difference. That is why the amount to be financed is specified rather than a percentage of the difference in cash at closing. Two other items of note apply to this section. First, the Buyer is obligated to make a diligent and good-faith effort to meet the terms and conditions of the Loan Approval by Closing; there are many instances where Buyers attempt to utilize the financing contingency to cover what is really "buyer’s remorse". The failure to submit required documentation is not good-faith. However, a post-mortem on a failed transaction is often very difficult to reconstruct. Second, the failure to obtain either a Loan Approval or to meet the terms and conditions of the Loan Approval does not automatically terminate the contract; instead, it gives either party the right to terminate the contract, but the party must do so in writing, presumably within a reasonable time after the time given for obtaining Loan Approval. And, then, if the Seller wishes to terminate, the Seller’s notice must state that the Buyer has three (3) days to deliver written notice waiving the financing contingency and agreeing to close regardless of whether approval is received (this provision is also new).

Often overlooked by the Seller is the requirement to deliver title evidence to the Buyer by the time prior to Closing specified in the contract; in fact, timely delivery rarely happens in most transactions. However, time is of the essence, and the failure to deliver the title commitment and copies of all instruments which constitute exceptions may become a problem if closing does not occur. The standard in Palm Beach County is to have the Seller deliver a title insurance commitment to the Buyer at the Seller’s expense. However, the obligation to provide the title evidence is placed on the Buyer at the Buyer’s expense in most other counties in Florida. The second standard probably makes more sense since the biggest complication of closing is financing and it sometimes creates a problem to have a Seller’s attorney or closing agent have to "jump through all of the hoops" required by the Buyer’s lender.

It is professional to establish a Closing Date which is not a Saturday, Sunday or Holiday (although, note Standard I). The Closing Date should be sufficiently far in advance to enable a Buyer to obtain financing, whether the contract is contingent upon the financing or not, unless the parties negotiate otherwise. Time will be of the essence with respect to the Closing Date (see also Standard I), unless the Closing Date is modified by other provisions of the contract. Modifications to the Closing Date which are not customarily agreed upon are those specified in Standard A (regarding title failure). A recent provision added to Paragraph VI allows an adjournment of closing for up to five (5) days if hazard, wind, flood, or homeowners’ insurance is not available at a reasonable rate due to extreme weather conditions. Extreme weather conditions previously meant that a windstorm level of tropical disturbance or greater was "in the box" compromised of fixed lines of latitude and longitude drawn in the Caribbean. However, the Insurance Commissioner has recently modified the box concept so that it varies on a windstorm-by-windstorm basis and this issue will be less likely to arise in the future.

The Seller is obligated to convey marketable title to the Buyer. Marketable title is an amorphous standard, but subject to some quantification, most notably by the Uniform Title Standards promulgated by The Florida Bar. However, often a marketable title is one declared to be so by a board-certified attorney who "knows it when he sees it." Although the standard for conveyance is marketable title, said marketable title can be subject to the restrictions, easements and limitations set forth in Section VII, provided that there have been no violation of the same and the same do not prevent the use of the Property for the purpose specified in such Section. Items to be noted in this regard are: (i) all matters appearing on the plat or common to the subdivision must be accepted by the Buyer; therefore a review of the plat is deemed advisable if you are advising a Buyer; (ii) outstanding oil, gas and mineral rights are acceptable, but only if the right of entry has been released; and (iii) all public utility easements are acceptable if shown on the plat; if not shown on the plat, they must be located within 10 feet of the property lines in the front and rear of the property and 7½ feet on each side.

If occupancy is delivered prior to Closing, the Buyer (i) assumes all risks of the Property from the date of occupancy; (ii) shall be responsible for maintenance from that date; and (iii) shall be deemed to have accepted the Property in its existing condition as of the time of taking occupancy. Therefore, Standards D and N would not apply after occupancy. Occupancy by the Buyer prior to Closing or by the Seller after Closing is universally disfavored by attorneys. If such occupancy must take place, then the safest method to evidence the occupancy is pursuant to a lease, which is separate and distinct, but related to the Contract (usually by a cross-default provision).

It is certainly preferable from a Seller’s point of view that a contract contingent upon obtaining financing not be assignable by a Buyer. If assigned, the same financing contingency terms would apply to the new Buyer, with the same time limit specified in the contract. If a contract is going to be assigned, then the original Buyer should not be released; he/she thus becomes a guarantor of performance secondary to the assignee.

Disclosure XI(a) is a recent addition to the contract and applies to special assessment liens payable in installments beyond closing. Such liens may be imposed by the local municipality for infrastructure (water, sewer, drainage) or sometimes by community development districts for the same purpose. Special assessment liens are not taxes; they are assessments for a specific purpose for a specific period of time in a specific amount. Disclosure XI(c) regarding mold is also a recent addition. Requiring disclosure of the Florida Building Energy-Efficiency Rating System Brochure (XI(d)) only applies to first time sales. Further Disclosures include (i) XI(e), regarding the lead-based paint rider, (ii) XI(f), requiring compliance with FIRPTA, (iii) XI(g), regarding the homeowners’ association disclosure (note that the homeowners’ association disclosure has been revised (more on this subject later), and (iv) XI(h), regarding possible increases in property taxes (as required by §689.261, F.S., effective January 1, 2005 - - copy attached). All such disclosures are self-explanatory

If left blank, then the default standard for the amount that the Seller will pay to treat and repair any termite is 1½% of the Purchase Price damages and an additional 1½% of the Purchase Price is specified to repair or replace items not meeting the working condition definition of Standard N. The prior version of the contract applied default percentages of 2% and 3%, respectively. With rising property values, even the reduced percentages produce large dollar amounts, possibly to the surprise of the parties.

III. RIDERS

FAR/BAR Contract Riders have been prepared to satisfy the disclosure section of the Contract and to provide for certain frequently recurring contractual variations. Copies of all riders are attached hereto.

The Condominium Association Disclosure Rider (hereinafter, the "condo rider") serves a number of useful purposes and should be attached to all contracts for the purchase and sale of condominium units. Some "homework" is required prior to the completion of the Rider. First, the Declaration of Condominium should be reviewed in order to determine whether a sale is subject to the approval of the Association and/or a right of first refusal by the Association and/or its members. Association approval is almost always required; rights of first refusal have fallen out of favor because (i) it is very difficult to establish a valid reason for refusing to approve a Buyer; (ii) very few Associations have the financial wherewithal to exercise a right of first refusal; and (iii) obtaining financing for the Association’s purchase of a unit is extremely difficult. In most instances, the Buyer needs to be approved by the Association only a few days prior to closing and the Buyer should apply for approval a few days after the Effective Date. The Buyer is required to use diligent effort to obtain the approval, including making personal appearances if required. Approval is a genuine contingency; the Buyer receives the return of his deposit if he is not timely approved (providing he has made timely application). The same may be said with respect to a right of first refusal. Paragraph 3 of the Disclosure requires the Seller to represent to the Buyer the amount of the current assessment, both for the unit and any recreational area, if required. If there is more than one Association, then the total assessments should be filled in. A very valuable function of the condo rider is the specification provided with respect to the payment of assessments. If the assessments are levied prior to the Closing, then the Seller is required to pay for them, even if they are allowed to be paid over time. A levy occurs when the Association’s Board and/or the unit owners, if required, have voted in accordance with Florida law and the condominium documents to approve the special assessment. Paragraph 3 also requires the Seller to divulge any knowledge of any pending special assessment. Although not perfectly clear, pending is generally interpreted to mean "under consideration, but not levied." However, some attorneys consider assessments which have been levied, but are payable in the future as pending and therefor complete this Section accordingly. Webster defines the adjective form of the word "pending" as "not yet decided: being in continuance"; therefore, both interpretations are reasonable and full disclosure should be made one way or the other. Paragraph 4 is the statutory form of disclosure required by the Seller of a condominium; sub-section (a) should be initialed if the Buyer has been provided a copy of the condominium documents and sub-section (b) should be initialed if the Buyer has not been so provided. Note that a three-day right of rescission exists beginning with the date that the Buyer has been provided with a copy of the condominium documents; if (b) is specified, then the Buyer should request a current copy of the documents in paragraph 5 and then initial paragraph 6 once he has received the documents. The Buyer may also subsequently sign a receipt for the documents in simple form and Sellers should insist upon receipt since it terminates the right of rescission and provides no doubt as to the termination date for the right of rescission. Parking spaces, garage spaces and storage areas are commonly assigned by the Condominium Association. Covered parking spaces are sometimes at a premium and, for that reason, it is prudent to find out which parking spaces are currently assigned to a particular unit. In most instances, the parking spaces are not limited common elements but do "follow the unit"; however, in some condominiums, there can be trading of parking spaces. Generally speaking, an Association will permit the trading of parking spaces by unit owners, but will not maintain a market or otherwise assist in that regard. If a Seller specifies the parking space in the condo rider, then the Seller cannot thereafter assign them or trade them to another.

A requirement imposed by the legislature in recent years is the Homeowners’ Association/Community Disclosure. This new Rider parallels the Condominium Association Rider by providing for a three-day right of rescission after the Buyer has received a disclosure summary, rather than the actual condominium documents which are specified in the Condominium Association Rider. The disclosure summary is then set forth in the remainder of the Rider in order to comply with new §720.401, F.S. 2005 (formerly §689.26, F.S.). A product of the 2004 legislature, this form (with reference to the new statute number) has not yet been widely circulated. The Rider was originally intended only to apply to homeowners’ associations in what are typically thought of as "gated communities." However, it would be prudent for a Seller to check his title insurance policy in order to determine whether there are covenants and restrictions affecting his Property, even if there is no association with lien rights. Prior to the age of gated communities, many older communities such as Palm Beach, West Palm Beach, Lake Worth, Boynton Beach, Boca Raton, etc., commonly utilized deed restrictions, which should arguably be disclosed pursuant to §720.401, F.S. (Some attorneys believe otherwise). Note that, as opposed to the condominium documents, the homeowners’ association documents need only be disclosed, not delivered. As a practical matter, most homeowners’ associations can provide a copy of their governing declaration, articles and by-laws, and delivery of those documents would be the type of disclosure least likely to lead to subsequent litigation. Obtaining copies of deed restrictions is not as difficult as reading them because of their age and often hand-written nature. Some Sellers are complying with their obligations under §720.401, F.S., by delivering to Buyer a copy of the exceptions page to their title insurance policies (Schedule B II).

Note with respect to all of the Riders that they apply by attaching them to the contract, completing any blanks, and then having the Buyers and Sellers initial the applicable provisions. Although the more-minor Riders have the imprimatur of the Florida Bar, they are often insufficient in many respects to address all of the issues for which they were drafted. Caution is in order. The author does not recommend use of the Rider for either Pre- Occupancy by Buyer or Post-Occupancy by Seller.

The "As Is" method of sale and purchase has become increasingly prevalent as parties wish to avoid the uncertainty arising out of the condition of the Property and the Seller’s repair obligations in connection therewith. There is now a FAR/BAR "As Is" Contract which supercedes the "As Is" Rider, but the Rider is still utilized by the unknowing. Basically, the "As Is" Rider gives the Buyer a limited period of time in which to conduct any inspections of the Property deemed necessary by the Buyer, with the unequivocal right to cancel and receive the return of his deposit if the Buyer is unhappy with the results of the inspections. The "As Is" Rider does not obligate the parties to renegotiate the Purchase Price as a result of the inspections, although, in practical application, this sometimes occurs on the theory that the same problems would arise in connection with any subsequent purchase and inspection of the Property. However, unless a modification is agreed to in writing, then the contract will close at the specified Purchase Price unless the Buyer gives notice of its election to cancel within the Inspection Period, which is a defined number of days after the Effective Date in paragraph 2 of the Rider. Note that, pursuant to paragraph 3 of the Rider, "As Is" means "as is as of the date of the inspection", not as of the date of closing; the Seller must maintain the Property in its condition as of the inspection through closing and the Buyer is entitled to verify the same by a pre-closing walk through. This Rider has become so prevalent that it has induced the FAR/BAR Committee to produce a separate form of contract for "As-Is transactions (As-Is-1 rev. 7/04). The "As-Is" contract re-states the above provisions in Paragraph XIV and also deletes Standards D and N.

With respect to the Rider for Sale of Buyer’s Property, there is a clause which allows the Buyer, until a certain date specified, to (i) close, (ii) cancel the contract and receive a refund of the deposits, or (iii) remove the contingency and the financing contingency and continue under the contract. Paragraph IV states that a Loan Approval which is contingent upon the Buyer selling his existing home is an insufficient approval for purposes of the contingency. If any contract is so contingent, then the "Kick-out" clause Rider will best protect the Seller by allowing the Seller to continue to show the Property and enter into bonafide back-up purchase contracts which are continent upon the termination of the first Buyer’s contract. The Back-up Contract Rider should be attached to all such contracts.

The VA/FHA Rider contains statutorily required disclosures and agreements and should be utilized if the Buyer is utilizing that method of financing and the Seller has agreed to it.

The FIRPTA Rider is not required since the basic contract now requires compliance with FIRPTA if it is applicable as result of the Seller being a foreign person; however, the Rider does provide more detail regarding such compliance.

The Lead-Based Paint Disclosure is a federally prescribed form of disclosure applicable only to residential dwellings built prior to 1978 (when lead-based paint ceased production). Note that, while violating the provisions of the Residential Lead-Based Paint Hazard Reduction Act may result in civil and criminal penalties, there is, technically, no right of rescission as a result of the failure to disclose. The Coastal Construction Control Line is also a statutorily required form of disclosure for waterfront properties located wholly or in part landward of the Coastal Construction Control Line, as defined in §101.053, F.S. (copy attached). Pursuant thereto, the Seller must provide the Buyer with a survey locating the CCCL. Again, the Buyer can waive the requirement, and, again, there is no right of rescission for failure to disclose.

The Insulation Disclosure is required only if the property is new construction.

I - INTRODUCTION

Until the middle of the twentieth century, the use of title insurance in real estate transactions was minimal. Much more common was the use of an attorney’s opinion letter with respect to the status of title. The primary deficiencies of attorneys opinion letters were that they were not standard, they were often full of loopholes, and very few attorneys had the wherewithal to satisfy a claim based upon the opinion letter. The primary emphasis for the use of title insurance in the residential real estate transactions was the expansion of the secondary mortgage market. The secondary mortgage market attracts funds from investors, promising a dividend, and then places the attracted funds in portfolios of mortgages purchased by originators such as banks, savings and loans, and mortgage insurance companies. FNMA and FHLMC are examples of secondary mortgage market institutions. The purchase of mortgage portfolios could have the same lack of uniformity as was the case with attorney opinion letters until the use of title insurance policies was expanded. The American Land Title Association (ALTA) was created in an attempt to come up with the uniform title policy (and commitments and endorsements). Today, those documents, with slight variations thereof, are useable in all 50 states and an insured mortgage is a requirement for purchase by secondary mortgage financing institutions. Although it was the demand for title insurance for a mortgagee that created the prime emphasis for title insurance, the owner’s policy of title insurance was quick to follow and is now more common than the mortgagee policy. The issuance of title insurance commitments, endorsements and policies is highly regulated at the state level. Regulation in Florida is pursuant to XIII of Chapter 627 and Section 69O-186, F.A.C.

Essentially, there are six (6) steps involved in the title insurance portion of a real estate transaction. The steps are (i) perform a title search, (ii) perform a title examination in order to determine the requirements for coverage and exceptions to coverage, (iii) issue a title insurance commitment setting forth such requirements and exceptions, (iv) satisfy the requirements and update title, (v) close, deliver and record the deed, and (vi) update title and issue the title insurance policy or policies and any endorsements thereto.

C. Title Companies.

In most large title title companies, staff responsibilities are grouped in accordance with the following six (6) functions. The most experienced staffer will close a transaction based upon his or her determination that all of the requirements for coverage have been satisfied. Sometimes, one person will handle more than one of the six steps, but, in all instances, all six steps must be performed.

For purposes of convenience, in most instances, the party (attorney or title company) providing the title insurance will also be the closing agent.

In order to determine the insurability of title for the purpose of issuing a commitment, endorsement or policy, a search and examination of title is required. §627.7845, F.S. (copy attached).

II. TITLE SEARCH

For many years, abstracts containing every document of record with respect to a particular property were maintained by title insurance or abstract companies. Abstracts were highly regulated. See Chapter 703, F.S. (copy of §703.03, F.S. attached). However, by now, all metropolitan counties, and many other counties, have had their real estate transaction records computerized, usually back to 1985 or so, and the need for abstracts has greatly diminished.

B. Prior Policy.

All title insurance underwriters allow almost any prior owner’s title insurance policy to be utilized as a base of title, thereby eliminating the requirement to search the record prior to the Effective Date of the prior policy. Sometimes, the Seller will be able to deliver a copy of the prior policy to the closing agent; in other cases, the title underwriter maintains a system for locating prior policies with respect to each residential property (assuming that a prior policy exists). When utilizing a prior title insurance policy as a base of title, all exceptions shown on the prior title policy should be included in the new title insurance commitment, together with those instruments of record obtained by searching the title after the Effective Date of the prior policy.

If utilizing a prior title policy, it is advisable to begin the search on the Effective Date of the prior policy, and not the day after. The reason is that instruments may have been recorded after the effective time on the Effective Date, and, it is good practice to review the deed into the existing Seller.

Most underwriters will provide a search of the records pre-computerization for a minimal fee, in which event the search begins upon the date of computerization. Searches in instances not described above are beyond the scope of this presentation.

Because many matters affecting title to property (i.e., judgments, divorce, death, etc.) are indexed by name, and not by the legal description, a name search of both the Seller and the Buyer is required. Such a search is also customarily made by computer.

Because taxes always constitute a superior lien on real property, the records of the tax collector must also be searched for the county in which the property is located. Whether paid or unpaid, taxes for the year of closing are to be prorated at closing pursuant to the FAR/BAR Contract.

III. TITLE EXAMINATION

Every title insurance underwriter provides a sometimes voluminous set of underwriting guidelines to each of its agents. The guidelines are designed to address the common issues that arise in examining title. The guidelines are generally comprehensive and are updated regularly by the underwriter. In most instances, the legal effect of a document found of record is described in the guidelines, as well as the requirements which should be satisfied because of the existence of the document.

B. Marketable Title.

Since the title insurance policy will insure title against marketability problems, another resource to be utilized in an examination of title is the Uniform Title Standards published by The Florida Bar. The determination of marketability of title is beyond the scope of this presentation.

Many underwriters will provide standard commitment clauses to be utilized when preparing title insurance commitments. Generally speaking, if the guidelines are insufficient to answer a question regarding the manner in which to address an instrument of record, most underwriters have underwriting counsel located statewide and/or locally.

See the materials prepared by Michelle Yanchula, Esquire, which are attached hereto.

If the search reveals that title is derived from either foreclosure, a quiet title action, or a probate proceeding, then an examination of the court files with respect to those actions must be conducted, again, in accordance with the underwriter’s guidelines.

In a number of instances, an existing document of record can be ignored for title insurance purposes because of the application of one or more of the curative statutes. An example is the Marketable Record Title Act, but there are "other curative" statutes found in the Real Property Sections of the Florida Statutes (see, e.g., Sections 689.18, 689.19, 692.02, 692.03, 692.04, and Chapter 694, a chapter which validates numerous types of conveyances, including 694.02, 694.03, 694.04, 694.05, 694.08, 694.11, 694.12, 694.15, 695.03 (the acknowledgment section) 695.05, 695.06, and 695.26 (the recording section).

The legislature has, from time to time, amended both the duration of judgments and the requirements for establishing the same. Generally speaking, a final judgment rendered against a person or entity will constitute a lien upon all real property owned by that entity in the county of recording, effective as of the date that a certified copy of the final judgment is recorded in the land records. §55.10(1), F.S. (copy attached). The Clerk of Court records all final judgments by the names of the parties, but the initial recording by the Clerk of Court is insufficient for this purpose and a certified copy of the final judgment must be obtained from the Clerk and placed of record in the official or land records of the county in order for the final judgment to constitute a lien on real property owned by the judgment debtor on the date of recording. Id. Judgments must contain an address for contacting the judgment creditor to determine the current amount due under the judgment. Id. A judgment may now be extended for an additional ten (10) years after the date of re-recording the same, together with an Affidavit stating the current address of the judgment holder. Id. The historical duration of judgment liens is as follows:

The lien of a judgment upon real property may last no more than twenty (20) years. §55.081, F.S. (copy attached). However, arguments have been made that the judgment itself may last longer, permitting levying upon the property of the judgment debtor after twenty (20) years. Richard H.W. Maloy and Cynthia Lynne, The Life of a Money Judgment in Florida Is Limited - For Only Some Purposes, 79 Fla. Bar Journal 7, pp. 20-27 July/August, 2005.

The holder of a mortgage is required to deliver to the mortgagor, within fourteen (14) days after request, a statement of the unpaid principal balance, accrued interest and per diem interest. §701.04, F.S. (copy attached). Some lenders require the mortgagor to request an estoppel letter. Others allow a closing agent to request an estoppel letter, either by fax or electronically by punching in the loan number and mortgagor’s social security number on the telephone.

IV. PREPARATION OF COMMITMENT

The form of all title insurance documents is regulated. §627.77, F.S. (copy attached). Florida underwriters customarily utilize a modified form of the commitments, endorsements and polices which have been promulgated approved by the American Land Title Association (ALTA). A sample form of Commitment is attached hereto.

Referring to the sample form of Commitment attached to these materials, note that Schedule A contains an Effective Date for the Commitment. This date is the date through which records are certified by the underwriter (for computerized searches) or the county clerks office (for non-computerized searches). There will always be a "gap" between the date that an instrument is recorded of record and the date that that recording becomes an official record available by on-line research or posting in the Clerk’s office. The duration of the gap depends upon the efficiency of the Clerk for that particular county in microfilming and posting each recorded document.

Schedule A also provides the name of each proposed insured (owner and mortgagee, if applicable), as well as the proposed amount of insurance for said party. The proposed insurance amount for the owner’s policy is generally speaking, the purchase price, and, for the mortgagee policy, the amount of the loan (usually 80% of the purchase price, but possibly, as much as 125% of the purchase price on negative amortization loans). In other than arms-length purchase and sales transactions, an appraisal may be required by an underwriter in order to establish the amount which can be insured under the owner’s policy.

Schedule A also provides the name of the current property owner. Hopefully, this is the name of the Seller under the contract that has been delivered in anticipation of the closing. This is a critical piece of information on the Commitment, because, if the party named as the Seller under the contract is not the owner of the property as revealed by the title search, then, either the transaction cannot be closed or additional requirements will be required.

The final section on Schedule A consists of the legal description of the property. Generally speaking, the legal description on a prior policy or deed into a seller is adequate, if confirmed by the title search. If the legal description does not refer to a particular Lot and Block, as established on a Plat recorded in the Official Records Book or a separate Plat Book, then the legal description should be verified prior to its inclusion on Schedule A. If the legal description is lengthy, then an Exhibit should be attached to the Schedule. If the legal description includes a metes and bounds (courses and distances) description, then it is universally recommended that one person read the typed legal description to another in order to verify its content.

Schedule B, Section I of the Commitment lists all of the requirements which must be satisfied in order to issue the title policy. See Section V below.

The exceptions to the coverage of the title insurance commitment and policy are set forth in Schedule B, Section II. This section contains all documents of record with respect to the property other than those that can be eliminated by satisfying a requirement (i.e., recording prior deeds, paid-off mortgages or liens, etc.).

A lender will customarily require that an underwriter insure the lender against the closing agent’s mistakes in following the lender’s closing requirements. The standard method for satisfying this requirement is for the underwriter to issue to the lender a Closing Protection Letter. Most title commitments contain a generic closing protection letter. Additionally, the underwriter is already liable for any misappropriation of funds by a licensed title agent §627.792, F.S. and 69O-186.010, F.A.C. (copies enclosed). Note that attorneys are not licensed by the Department of Insurance but would be subject to Rule 5-1.1 of the Rules Regulating The Florida Bar. Nevertheless, the "golden rule" applies (he who has the gold makes the rules).

Most often the lender requires the original Commitment. Generally speaking, the lender is faxed a copy of the Commitment prior to closing, and the original is included in the closing package sent to the lender after closing. The Buyer is generally furnished a copy of the Commitment, sometimes initialed by the issuing agent in order for the copy to be valid. Only one Commitment is issued, even though a policy will be delivered to both the mortgagee and the owner.

V. SATISFACTION OF REQUIREMENTS

It is always a requirement in a transaction that the owner deliver a deed to the proposed insured. Although the FAR/BAR Contract requires delivery by the Seller of a statutory Warranty Deed, title insurance is predicated upon the execution and delivery by the Seller of either a Warranty Deed or a Special Warranty Deed. A Quit-Claim Deed is not insurable. Another universal requirement is the payment of full consideration by the Buyer to the Seller, although this is very rarely an issue because there is no closing without satisfying this requirement. The third standard requirement is the execution of any and all loan documents required by a proposed insured mortgagee. Other requirements are as specified in the underwriting guidelines issued to the agent.

In many instances, there are no instruments of record with respect to a property from the date of the prior policy except for a current mortgage, which must be satisfied, and a satisfaction of the mortgage given by the owner prior to the current owner. However, there still will be requirements of a routine nature such as (i) obtaining an estoppel letter from the Condominium or Homeowner’s Association regarding the status of assessments; (ii) obtaining an estoppel letter from a municipality with respect to liens permitted by Chapter 159, F.S.; (iii) obtaining and examining a survey (which is required for a mortgagee policy), with the inclusion as exceptions of all adverse title matters revealed thereby (note that the FAR/BAR Contract requires that the survey be delivered and reviewed during the same period that evidence of title is delivered and reviewed); and (iv) a Seller’s Title Status Affidavit regarding parties in possession and construction liens (again, required by a lender in order to delete standard exceptions). The survey and affidavit requirements must be met in order to issue a mortgagee policy, because a mortgagee policy contains no standard printed exceptions for such matters (see below). They are not required in order to issue an owner’s policy so long as the standard printed exceptions therefor are not deleted. However, if the aforesaid survey and affidavit are delivered, then §627.7842, F.S. (copy attached) requires that these exceptions be deleted (other than for adverse matters revealed by the survey).

Other requirements will be based upon the results of the title examination and the underwriting guidelines. Sometimes the requirement will be simple; i.e., obtaining a Continuous Marriage Affidavit when the survivor of a joint tenancy intends to convey after the death of the deceased joint tenant/spouse. In other instances, the requirements may be considerably more difficult and/or time consuming; i.e., obtaining a release from an heir in an estate that was not properly probated, or foreclosing as a result of improper notice or other defect. These "other" requirements are always imposed as a result of some matter which is revealed during the examination of title or absent.

The timely satisfaction of the requirements is very often the key indicia of a smooth closing. Note that Standard A of the FAR/BAR Contract addresses issues that arise when the examination of title indicates matters that must be cured by the Seller, but cannot be completed by the closing. Review Standard A at this time if you have not done so already. The requirements usually specify the method for satisfying the same. If the requirements are not satisfied, then the lender will not fund the loan. Very often, an unsatisfied requirement at closing reeks havoc upon the transaction because the interest rate provided by the lender to the borrower has a lock-in date which may expire before title can be cured. Similarly, the Seller sometimes has to close upon the purchase of another home and the failure to do so may result in a default under the contract for that transaction. Notwithstanding said problems, Standard A provides that the Seller will have a curative period as provided therein (see below).

The closing documents, and the responsibility for preparing the same are set forth in Standard J of the FAR/BAR Contract. Other than for financing documents, the Seller is customarily required to generate all of the closing documents. Notwithstanding the foregoing, however, the party providing the title insurance will usually generate the documents because they are a "click" on the closing agent’s computerized closing program. For instance, in Palm Beach County, where the Seller normally provides the title insurance, then the preparation of the closing documents by the Seller is more often followed.

All underwriters require that the title search be "brought-down" or, really, "updated" from the Effective Date on the commitment to the last date possible prior to closing in order to minimize the duration of the "gap." For all computerized searches, ordering an update is generally just a click on the search program. It is important, however, to update both the title search and the name search during the bring-down. A closing agent which disburses funds is required to delete the "gap". §627.7841 and §627.7842, F.S. (copies attached previously).

The FAR/BAR Contract requires that all ad valorem-type taxes for the year of closing shall be pro-rated as of closing. Since ad valorem taxes in Florida are paid in arrears, the re-proration involves a credit to the Buyer for all closings until tax bills are issued in November of each year. For closings in November and December, taxes are usually paid by the closing agent, and pro-rated based upon each party’s period of ownership for that year. Some underwriters provide the ability to search online for the status of ad valorem tax payments, as do most tax collectors in urban counties. Both sources are usually accompanied by disclaimers, and it is the better practice to call the tax collector’s office in order to verify the status of tax payments by the individual property control number for the property to be conveyed.

Satisfying the requirements in order to close a cash transaction pales in significance to satisfying the requirements of a lender. Many lenders are requiring closing agents to obtain a survey and obtain homeowner’s insurance coverage. All lenders request the closing agent to prepare a pro-forma closing statement, based upon the lender’s expenses, which must be approved by the lender’s loan closer prior to closing. The loan proceeds (amount of the loan minus the lender’s fees) are then sent to the closing agent by check or wire transfer. All lender’s instructions and/or requirements (sometimes as long as six pages) should be carefully reviewed prior to closing.

It is the common practice for the closing agent to deliver insured title to the property to the Buyer at closing and an insured first lien priority to the lender at closing. This is generally accomplished by either (i) marking-up the Commitment to show the satisfaction of the all of the requirements and the deletion of applicable exceptions or (ii) the issuance of an endorsement to the Commitment stating the same. Pursuant to §627.7841, F.S., the underwriter assumes liability for intervening instruments. Note, however, that the Seller’s potential liability under the warranties in the deed and/or the title affidavit signed by the Seller will generally cause the Seller (assuming that he can be located) to be willing to address any intervening matters.

VI. CLOSING, DISBURSING AND RECORDING

Closing is "show time" for the closing agent. A closing agent who has had time to adequately prepare for the closing will have all of the closing documents, including the closing statement, approved by all parties prior to closing. The closing agent is responsible for seeing to the execution, witnessing, acknowledging, and delivery of all of the closing documents. Title passes from the Seller to the Buyer when the Seller delivers to the Buyer (or closing agent) a deed to the property which has been fully executed and witnessed by two (2) persons. §689.01, F.S. (copy attached). A power of attorney subject to §§709.01, F.S. and 709.015, F.S. (copies attached) may be utilized in order to execute the deed, including a deed to homestead property (§689.111, F.S. - copy attached), but it must be recorded with the deed (§695.01, F.S. copy attached). Although delivery of the deed conveys title from seller to buyer, recordation is necessary in order to place third parties on notice of the transfer. Recordation requires an acknowledgment. See §§695.03 and 695.26, F.S. (copies previously attached) for the statutory requirements applicable to the recordation and notarization of instruments. The Seller may not wish to attend the closing, and, thus create a "mail away". In such instances, the Seller is sent all of the closing documents in advance, with instructions on how to execute, witness and acknowledge each closing document. However, most of the time, the settlement statement cannot be prepared until one or two days before closing or the day of closing because the closing agent will not have received the lender’s charges, prepayments and escrow figures until that time. It is permitted in such instances to have a separate Seller’s closing statement because the Seller’s closing statement is not affected by the Buyer’s loan fees and costs. Given the numerous documents, signatures and initials associated with closing a loan, a mail-away for a Buyer obtaining a loan is not recommended.

Disbursement may only be made once the closing agent has received both the Seller’s cash to close and the loan proceeds in acceptable form. Whereas previously lender’s would send a check for the loan proceeds, the common practice today is to have the money wired to the trust account for the closing agent. As set forth in Paragraph II(e) of the FAR/BAR Contract, the cash to close should be sent by either wire transfer or a LOCALLY DRAWN cashier’s or official bank check. Locally drawn customarily refers to a bank or credit union located in the county where the property is located. Whereas a personal check is not acceptable for the cash to close, some closing agents will accept a personal check for a small portion thereof in the event that the closing figures change at the last minute and the Buyer has already obtained a certified or cashier’s check for the prior cash to close. Disbursement may be made by either trust account check or wire transfer. Wire transfers generally entail an additional fee imposed by the bank for the closing agent; however, wire transfers are generally provided at no charge with respect to attorney’s IOTA accounts. Probably the number one reason for lengthy closings is that a wire transfer for the loan proceeds or the cash to close has not yet been received by the closing agent. Whenever possible, the closing agent should require the cash to close to be wired the day prior to closing (assuming that the amount thereof can be determined). If the Buyer is unwilling to forward the cash to close one day early, then the Buyer should be advised to order the wire transfer on the day prior to closing, to be effective first thing in the morning on the day of closing. In such event, the funds should usually arrive in time for a mid to late afternoon closing. Note that many banks generally require wires out to be ordered by noon in order to go out that day. Also, many banks rarely acknowledge receipt of a wire transfer after 2:00 o’clock p.m., which means that an additional day’s interest will sometimes be incurred on the loan being paid. For this reason, among others, it is good practice to add a few days to the payoff amount for most existing (Seller’s) mortgage loans in order to ensure that the required amount is timely received by the cut off time for receipt of payments regarding the existing mortgagee. If too much money is sent to the Seller’s lender, the lender will repay any interest overpaid by the seller/borrower, generally at the same time as the escrow reserves are returned to the borrower.

Recordation can be accomplished by delivering any corrective instruments, the deed, and the mortgage to the official recorder for the county in which the property to be insured is located. Recording the deed requires the recordation of a form DR 219 (copy attached). §201.022, F.S. (copy attached). Form DR 219 advises the recording office of the amount of the consideration paid for the property so that the amount of the documentary stamps can be verified. It also tells the property appraiser the amount of the consideration paid for the property so that the assessed value of the property can be updated on the next January 1^st. Note that, in events where the Seller has owned the property for many years as a homestead, the assessed value will likely be increased substantially for the year after closing, even if the Buyer obtains (a new) homestead status for the following year. See Paragraph XI(h) of the FAR/BAR Contract for the recommended notice in this regard. The order of recording documents should be first, corrective instruments, second, deed, and third, mortgage and riders thereto. Section 695.11, F.S. (copy attached). However, a corrective instrument can be placed of record at any time and a mortgage recorded after a deed in to the mortgagor will still be valid under the after-acquired title doctrine. See also §695.12, F.S. (copy attached), as to correcting the record.

Taxes and fees are paid to the County Clerk at the time of recordation. Recording fees are currently $10.00 for the first page and $8.00 for each succeeding page. Some counties charge a $.60 per document "indexing fee." Documentation stamps on the deed are $.70 per $100.00 or fraction thereof of consideration. §201.02, F.S. But see §§201.0205, and 201.031, F.S.

VII. POLICY ISSUANCE

Title should again be searched through the date of recordation of the deed, for the owner’s policy, and the mortgage, for the mortgagee policy. Any intervening matters appearing of record must be addressed.

The Effective Date of the owner’s policy is usually one minute after the date of recording, as shown on the deed. The proposed insured in the Commitment is now shown as the owner on Section A of the policy, usually "by virtue of deed recorded in Official Records Book _______, Page _____." The exceptions set forth in Schedule B, Section II of the Commitment are continued as exceptions in the owner’s title policy, subject to the possible deletions required by §627.7842, F.S. The owner’s policy, together with the recorded deed, is usually sent to the Buyer or Buyer’s attorney approximately thirty (30) days after closing. Copies of loan documents are generally distributed to the Buyer at closing pursuant to RESPA; however, copies of the other closing documents are often included in a package from the closing agent to the Buyer sent with the title insurance policy. A sample owner’s title insurance policy is attached hereto.

Mortgagee’s generally require that their policy be issued within thirty (30) days after funding. Again, the proposed insured from the Commitment is now the insured under the policy. There are no standard printed exceptions in Schedule B, Section II, but the specific exceptions for that property are included. Note that, in some instances, the exceptions that the lender will take title subject to are set forth in its requirements for closing the lender’s loan. Therefore, it is always worthwhile to check those requirements so that a title exception does not create a problem for the lender. Problems for the lender sometimes result in attempts at "fines" of the closing agent by the lender for failure to follow the lender’s closing instructions. Note also that the lender can rely upon the Closing Protection Letter in order to request the underwriter to cure any defect, in which event, the underwriter will require the closing agent to solve the problem. A sample mortgagee’s title insurance policy is attached hereto.

Hopefully, the Satisfaction with respect to the Mortgage of the Seller will appear of record within the thirty (30) day period after closing, but it is the closing agent’s duty to follow-up and ensure that said Satisfaction is in fact recorded. Some lender’s are notoriously late in recording a Satisfaction of Mortgage. However, see §701.05, F.S. (copy attached), in this regard, making the failure to cancel and satisfy of record of mortgage, lien or judgment within thirty (30) days after receipt of demand therefor a second degree misdemeanor. The author is unaware of any prosecutions under this statute, but sending a copy of the statute to the prior lender can sometimes generate a change in priorities. However, threatening criminal prosecution to obtain civil relief violates Fla.Bar. R 7-1051(A) The Fla. Bar. V. Suprina, 484 So.2d 1245 (Fla. 1986).

All underwriters require that a copy of the policy (insert pages only) be forwarded to the lender promptly after the issuance thereof, together with the underwriters remittance due for the insured amount. The amount due to the underwriter (the "risk premium") is regulated. §§627.7711(2), 627.780, 627.782, F.S. (copies enclosed) and §§69O-186.003 and 69O-186.005, F.A.C. The closing agent is responsible to the underwriter for this amount. Therefore, it is generally useful to a closing agent to ascertain, by closing program or otherwise, the amount which will be due for a particular policy on or before the time that the closing statement is finalized.

VIII. TITLE ENDORSEMENTS

Prior to approximately ten (10) years ago, title underwriters were permitted to "affirmatively insure" against loss as a result of a claim based upon some adverse matter appearing of record in the title. The underwriter would agree to provide the affirmative insurance based upon its assessment of the (hopefully slim) likelihood that the instrument would result in a lawsuit or title issue. However, the primary purpose of title insurance is to eliminate risk pursuant to the search examination and requirements process. §627.845, F.S. (previously attached). To insure over a specific known risk would convert title insurance to casualty insurance, in violation of §627.784, F.S., (copy attached). The Florida Chief Financial Officer (formerly, the Insurance Commissioner) declared that this was not an acceptable practice and currently there are a limited number of endorsements which can be issued by an underwriter and the form of those endorsements must be approved by the CFO.

As is the case with respect to both commitments and policies, the requirements for the issuance of endorsements is governed by guidelines issued by the title underwriter. Customarily, the guidelines are equally applicable to owner’s and mortgagee’s policies (not so for FF 9).

The following constitute the only endorsements which can be issued in connection with an owner’s policy in Florida. Copies of all endorsements are attached hereto.

3. Contiguity Endorsement.

See Section VIII C., paragraph 8, above.

See Section VIII C., paragraph 10, above.

See Section VIII C. paragraph 6 above.

See Section VIII C, paragraph 7, above.

See Section VIII C., paragraph 2, above.

See Section VIII C., paragraph 3, above.

I. INTRODUCTION

The number one recommendation for avoiding closing agent liability is to stay within your area of expertise. If you are an attorney, but do not regularly practice real estate transaction law, obtain the assistance from an attorney who does. If you are a real estate broker, but do not have experience with the preparation of contracts, then consult a more experienced broker. The same applies to title agents, loan officers and closing agents. The second general recommendation for avoiding liability is to become so organized that someone else can look at your transaction at any stage and pick it up and go from there to closing. This would include a check list for each stage of the closing, contact information for all parties to the closing, and appropriate files and folders for the necessary documentation. The third general recommendation for avoiding liability is to be aware of the obligations that you have to each of the parties to the transaction and fulfill those obligations.

The first general recommendation is a matter of personal decision, but the second and third recommendations can be acted upon. The remainder of this section will address ways to improve organization so as to avoid liability with respect to the many obligations which are owed to the parties as a closing agent. Title-related issues will be mentioned but not discussed in detail in view of the next speaker’s topics. Generally speaking, they closing agent will perform the following tasks:

2. Review the requirements for conveying good title. Obviously, a deed is required. Where the buyer is obtaining financing, a mortgage and associated loan documents must be executed. Any existing mortgage will have to be satisfied or assumed. Any regular or special condominium assessments or homeowners’ association assessments must be paid. Any municipal liens or Chapter 159 Liens must be satisfied. A Certificate of Approval will be required if the property is a condominium.

II. AVOIDING LIABILITY TO THE BUYER/BORROWER

Apportion or pro-rate expenses as required by the contract. Deliver the documents and title condition required by the contract. Close and disburse as required by the contract.

There have been cases in other jurisdictions where a closing agent has been responsible for not disclosing to a Buyer an "obvious" defect in title. The extent of this liability in Florida is not yet ascertainable. A closing agent generally has no contractual privity with the Buyer, but the theories of implied contract or negligent misrepresentation and fraud have been utilized by Buyers in such situations. Generally speaking, a closing agent may be the most solvent and available person and is almost certain to be included in any lawsuit involving a title or closing defect. The seller will be hard to find; the brokers will also be joined.

§627.842, F.S. provides as follows:

Closing agents must comply with the statutory requirements.

Ensure that the legal description on the documents is the same as the legal description on the Title Commitment and loan documents and that the Seller owns the Property so described.

From the funds collected from the lender and the parties, all invoices that are submitted to the closing agent, such as by a surveyor, appraiser, inspection company, pest control company, etc., must be paid. It is a good idea to inquire about such payments even if you do not receive such invoices. However, no case could be found which imposed liability on a closing agent to collect a fee for a vendor of which the closing agent was unaware (distinguish fees specified in closing instructions to the lender’s agents).

An explanation of the HUD-1, beginning on the second page, is relatively easy since the format and the process are routine for closing agents. An explanation of the effect of other documents, including the status of title, is not so easy. If you are a closing agent and not an attorney, you cannot give legal advice, and you will walk a fine line between not raising eyebrows or alarm on the one hand and becoming a silent indemnitor on the other hand for everything that is either negligently or not fully disclosed. If you are an attorney for the seller and a closing agent, you really cannot give legal advice to the Buyer and will also walk a thin line between closing a transaction and exposing yourself to potential liability. Unfortunately, our society seems to allow persons such as Buyers to save the cost of obtaining an attorney who will explain their rights in full and then sue others to vindicate rights that could have been preserved had the attorney been called. For all practical purposes, the rule of "caveat emptor" or "buyer beware" has been eliminated in Florida residential real estate transactions (see Exhibit "A" to the next section regarding the Johnson v. Davis cases), the concept of merger of the contract into the deed has numerous exceptions, and no adequate protection exists against claims of fraud and misrepresentation.

Obtain a valid payoff or estoppel letter from all existing lien holders, including mortgagees, and insure that payment is made with sufficient per diem to satisfy those lien holders and mortgagees. After closing, follow-up to ensure that satisfactions, judgments and liens are recorded. Even though most payoff letters today are of the "swiss cheese" variety, they can be relied upon in most instances. However, never accept an oral payoff or estoppel information.

III. AVOIDING LIABILITY TO THE SELLER

See II A. above.

B. Closing Documents.

Most closing agents utilize computer-generated forms for the Deed, Bill of Sale, Seller’s Title Affidavit, FIRPTA Affidavit, Closing Statement, and Closing Statement Addendum. See the attachments to the prior section for sample forms. If you are an attorney representing a Seller, explain, in whatever detail he prefers what the Seller is signing. Even if the Seller does not prefer, it is in the Seller’s/closing agent’s best interest to explain anything that is not obvious so that you do not become the silent indemnitor "to the client" who says "Just show me where to sign."

Explain each line on the Closing Statement, beginning on page 2. If the closing is prior to November, the Seller will probably need an explanation of how taxes are collected in arrears and pro-rated so that the Buyer obtains a credit against the Purchase Price for the taxes which would have been due for the period of the Buyer’s ownership of the Property. It is now a good time to discuss the issue of re-proration of taxes. The contract provides "Tax proration based on an estimate shall, at the request of either party, may be adjusted upon receipt of the tax bill on condition that a statement to that effect is signed at closing." While the contract language does not require the statement to be signed, it is prudent for the closing agent to include such a statement in order to avoid potential liability. It is also prudent to disclaim liability for re-proration calculation, assessment and collection. See the Closing Addendum in the prior section.

It is a good idea to explain to the Seller that any escrows that are in the hands of the lender will be reimbursed to the Seller unless the payoff letter provides otherwise. In this regard, many closing agents provide a copy of the payoff letter to the Seller in explanation of their payoff amounts. Also, many closing agents add one day’s per diem interest in order to avoid timing issues with respect to the delivery of the check for payoff after the time period for daily acceptance of that check by the lender. If there is any excess, the Seller can be advised that any excess will be refunded to him by the lender.

Generally speaking, unless the escrow procedure which is set forth in Standard Q is utilized, the Seller will expect to walk away from Closing with either a check for the closing proceeds or a wire transfer for those proceeds. It is a good idea prior to Closing to find out which method is going to be preferred by the Seller. For instance, if the Seller is going to immediately utilize the proceeds to buy another house, a wire transfer would be required, and, in such instance, the closing agent will probably want to collect for a wire transfer fee on the closing statement. Also, the timing issue will be relative to the closing coordinated by the closing agent (i.e., morning sale, afternoon purchase).

IV. AVOIDING LIABILITY TO THE BUYER’S LENDER

By far, the closing agent’s most onerous responsibilities and greatest potential liability is to a non-party to the transaction, the lender to the Buyer. This fact arises largely because (i) most buyers require financing; (ii) most financing is federally insured; and (iii) the golden rule applies (he who has the gold makes the rules). The closing agent will acquire a contractual liability to the buyer’s lender customarily pursuant to closing instructions that the closing agent must sign and return and/or pursuant to a closing protection letter issued by the closing agent’s underwriter with respect to the transaction. The trend is for the Buyer’s lender to impose more and more obligations upon the closing agent, such as procuring and verifying the status of title to the property, surveys, insurance, appraisals, inspections, etc. Further, most lenders insist upon receiving via air courier all loan documents on the next day after closing (or face a $100.00 per day penalty). Further, multiple copies of the closing documents, some hand certified, must be included.

Even though a closing agent has closed numerous transactions for numerous lenders, it would be risky for a closing agent in any given transaction to assume that the closing agent knows what the lender wants in that transaction. There is no substitute for reading carefully each lender’s closing instructions and highlighting any matters that seem unusual. Any required post-closing compliance is certainly a waste of time, even if it does not impose liability. And, most closing instructions specify that the money provided by the lender may be disbursed only when the closing agent has complied with the required instructions; any violation creates potential liability. Note that some lenders require a funding number to be filled in when returning the closing documents post-closing. The funding number is usually obtained only after the lender has approved the closing statement that the closing agent has prepared. Even if a funding number is not required, it is always a good idea to fax a closing statement to the lender for its approval prior to closing. Some lenders reject closing statements if expenses are not listed identically to that specified on the closing instructions. It is also a good idea to fax to the lender a reconciliation statement at closing, since it confirms the "net funding" aspects of the transaction. Most computer-generated closing statements will not print out a closing statement that is not in balance; however, the closing agent must ensure that the amount wired in by the lender correctly allocates all net funded amounts.

C. "Heads Up".

Most closing instructions require that any exceptions to title meet certain requirements. Review these requirements in detail. Most closing instructions do not allow for hand-written modifications. Most closing instructions preclude second mortgages; check early on to ensure that the Buyer understands this limitation. Similarly, the making of a loan or gift to fund all or a portion of the purchase price is prohibited by most lenders. Do not assist in a violation by accepting a check from a third party at closing. Inquire early if the parties will be present at closing; if not, a limited power of attorney must be prepared and submitted to the lender for its approval. Make and keep copies of driver’s licenses in the file. Make some review of pictures and signatures for identity verification and acknowledgments.

V. AVOIDING STATUTORY LIABILITY

There are three primary federal statutes of concern to closing agents. The first of these statutes is the Real Estate Settlement Procedures Act, 12 U.S.C. §1261 et seq. ("RESPA"). RESPA was originally enacted in 1974 in order to (i) help consumers become better shoppers for settlement services by requiring certain disclosures and (ii) eliminate kickbacks and referral fees that increased the cost of covered transactions. RESPA covers all transactions which involve a "federally related mortgage loan", which, for all intents and purposes includes just about every type of residential loan secured by a mortgage other than from a private individual. RESPA applies by regulating the provision of settlement services in connection with federally related mortgage loans. Settlement services include any service provided in connection with a real estate settlement, including, but not limited to, title searches, title examinations, title certificates, title insurance, services rendered by an attorney, the preparation of documents, surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of federally related mortgage loans, and the handling and processing of closing or settlement. It would be virtually impossible to provide services as a closing agent and not be subject to regulation by RESPA.

The primary focus of RESPA’s "better shoppers" efforts are three-fold. First, a good-faith estimate of settlement costs, a disclosure of the lender’s intentions to service the loan, and a special information booklet are required to be given within three days after the lender has received a loan application. Second, every settlement service provider involved in a RESPA covered transaction must provide to the borrower a disclosure of any controlled business arrangement. Disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider’s charges. With few exceptions, the referring party may not require the consumer to use a particular provider being referred to in the controlled business arrangement. Third, loan servicers must deliver to borrowers an annual escrow statement. Of these three disclosures, only the controlled business arrangement would apply directly to a closing agent, and a description of all of the requirements of this section (12 U.S.C. §2607(c)(4)) are beyond the scope of this seminar.

The primary focus of RESPA with respect to the elimination of kickbacks and referral fees was initially prevention and is now creeping towards disclosure. In fact, under current consideration, a lender could simply guarantee the total amount of closing fees to a borrower and then need not disclose any controlled business arrangements or be worried about making kickbacks under the theory that "how the lender does it" does not matter as long as there is a more accurate basis for allowing consumers to satisfy the first focus of being better shoppers. Until that changes occurs, RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. RESPA also prohibits fee-splitting and receiving unearned fees for settlement services not actually performed (12 U.S.C. §§2607(a) and 2607(b), respectively), unless there is a controlled business arrangement and disclosure is made (12 U.S.C. §2607(c)(4)). Generally speaking, it is illegal to provide anything of value to any provider of settlement services for the referral of business. This has been interpreted, for example, to prohibit title companies from providing food for a real estate broker’s open house program. Similarly, a real estate broker cannot receive anything of value from a title insurance company or closing agent for the referral of business unless the requirements of a controlled business arrangement are met, which provisions specifically prohibit any form of payment based upon the volume of the referrals. Similarly, attorneys cannot provide free or discounted legal services to either builders or lenders in exchange for the referral of business for either attorney’s services or settlement services. All parties providing settlement services are allowed to be compensated in a reasonable amount for services actually rendered. Violation of RESPA’s anti-kickback, referral fees and unearned fees provisions could subject a closing agent to a fine of up to $10,000.00 and imprisonment for up to one year for each violation. Additionally, a provider can be liable to the person charged for an unearned settlement service in an amount equal to three times the amount of the charge paid. And, if a seller or lender requires a buyer to obtain title insurance from a designated provider, the buyer can recover an amount equal to three times all charges made for the title insurance.

The second federal statute of concern to closing agents governs the provision of loans secured by an interest in real property. The primary purpose of the Truth In Lending Act, Title I of the Consumer Protection Act, 15 U.S.C. §1601, et seq. ("TILA"), was to enable the borrower to compare the cost of a cash versus a credit transaction and to discover the difference in the cost of credit among different lenders. The most common application of TILA is in its regulation of advertisements regarding interest rates; i.e., the definition of the annual percentage rate or "APR" is required and its method of calculation is defined. The second most common application of TILA is with respect to the disclosure requirements under Regulation Z; i.e., a disclosure of the annual percentage rate, the method of determining the finance charge, the balance upon which a finance charge will be imposed, the amount of the finance charge, the amount to be financed, the total of payments, the number and amount of payments, the due dates or periods of payments scheduled to repay the indebtedness, and other disclosures imposed time to time. The disclosure is required to be in a specific format, both as to an estimate provided within three days after receipt of a written application, and at the time of closing. The third most common application of TILA, and the one most applicable to closing agents, is the right to rescind where a security interest will be retained or acquired in a consumer’s existing principal dwelling, most commonly occurring in a refinance transaction. Compliance by closing agents with Regulation Z in a refinance transaction commonly involves obtaining the signature of the borrower or borrowers to a disclosure statement which identifies the rescission period and discloses the security interest being acquired, the right to rescind, and how the right may be exercised. Additionally, the closing agent must deliver two copies of the Notice of the Right to Rescind to each consumer entitled to rescind and to explain how the right to rescind is to be exercised, generally by mailing, filing, faxing or delivering to the lender’s designated place of business a Notice of Cancellation at anytime until midnight of the third business day following consummation of the transaction. However, the consumer may exercise the right to rescind until midnight of the third business day following delivery of the Notice of the Right to Rescind, or all material disclosures, which ever occurs last, even if the transaction has closed and funded. Any consumer harmed by a violation of TILA may bring a civil action against the lender for the following remedies: (1) actual damages; (2) damages of twice the amount of any finance charge; (3) damages not less than $200.00 or greater than $2,000.00; and (4) reasonable attorney’s fees. And, these damages are in addition to the right of rescission. Most lender’s closing instructions require the closing agent to comply with the requirements of TILA. Therefore, if for any reason the lender does not provide a form acknowledging receipt of the disclosure statement and the copies of the right to rescind in a refinancing transaction, then the closing agent would be well advised to do so.

The third federal statute of concern to closing agents is The Home Ownership and Equity Protection Act of 1994 ("HOEPA"). HOEPA was implemented to curb the predatory lending practices of certain lenders in the sub-prime market. HOEPA applies where "the total point in fees payable by the consumer at or before the closing exceeds the greater of (i) 8% of the total loan amount; and (ii) $400.00." 15 U.S.C. §1602(a)(1)(B). Whenever HOEPA applies, certain disclosures are required as enumerated in §1639(a)(b) of TILA. Where inadequate disclosure occurs, the borrower has a right of rescission. 15 U.S.C. §1635. The closing agent may contribute to a HOEPA violation by splitting a check due the borrower for loan proceeds with a mortgage broker who maxed out his 8% limit on the closing statement.

VI. AVOIDING FRAUD

Avoiding fraud is not just generally desirable; it is the closing agent that is most often the party with the greatest out-of-pocket loss as a result of fraud. Fraud in real estate transactions is increasing and is even being described as epidemic in Miami-Dade County. The forms of fraud are ever-expanding and the resultant losses must often be paid into the escrow account of the closing agent in order to avoid placing someone else’s money in such account at risk.

Most title underwriters now utilize an e-mail system to warn agents of counterfeit checks, suspect parties, suspect lenders, and other potentially fraudulent matters. It is prudent for all involved in the closing process to review such bulletins on a timely basis. Recently, a lender failed to fund certain loans because interest rates rose and it failed to pay to reserve the loan funds; don’t disburse until the loan proceeds are on-hand.

Recent cases of potential liability for fraud included the following. A title agent has been sued for failing to detect the fact that a party signing settlement documents was mentally incompetent. The law in Florida is that a person is presumed competent until the court declares otherwise. However, allowing a incoherent person to blythely sign documents may subject the closing agent to liability for negligence, breach of contract or conspiracy to defraud a lender. Identity theft is also increasing at a rapid rate. This may take the form of a simple impersonation at closing, as has happened in Palm Beach County in a familiar divorce case. In general, divorced parties are prone to misdirect closing proceeds and any disbursements should be in the name of both parties. Although closing agents are not hand-writing analysts, some forged signatures might be detected by comparing a signature to that on a photo ID or a prior mortgage. Of course, acknowledgments require either personal knowledge or photo identification pursuant to statute.

D. Flipping.

Flipping is a type of organized fraud involving several different participants. A typical flipping case involves a buyer who acquires title to a certain property and then quickly sells it at a large increase in price to another party, obtaining a loan for a large portion of the purchase price. A cooperative appraiser supports the increased purchase price and the lender is defrauded when the purchaser defaults and foreclosure does not result in proceeds sufficient to satisfy the mortgage. Closing agents have actually participated in this type of fraud ring. Any sale shortly after a purchase (some have even occurred on the same day) is suspect. A purchase money second mortgage is also suspect, as would be a contribution from the Seller to the Buyer of the difference between the loan amount and the contract purchase price. Generally speaking, any modification from a standard transaction which results in the closing statement not reflecting accurately the incoming and outgoing funds can subject the closing agent to potential liability pursuant to RESPA or the lender’s closing instructions.