Real Estate Tip: Buyers’ Blues

Buyer beware is an old warning. A recent title insurance case reminds us just how wary a buyer must be, even in 2015. In the case of IQ Holdings, Inc. v. Stewart Title Guaranty Co.,  2014 WL 6601148, the buyer thought it could rely either on an escrow agent’s responsibilities, on the title insurance company insuring the closing, or on the title insurance policy itself. The buyer was wrong on all counts.

As is the case in most closings involving a condominium unit, the title insurance policy took an exception for matters that are set forth in the condominium declaration. Reading the declaration and other documents to which it refers is a very time consuming task and something many buyers will not do, even in the case of a commercial condominium. In IQ, the declaration included a right of first refusal. At the closing, the sellers produced a waiver of the right of first refusal but not with respect to the LLC that purchased the property. Instead, the release named individual members of the LLC and the escrow agent accepted that release. When the LLC later attempted to sell the condominium unit to its members as individuals, the condominium association successfully challenged the second sale saying it had not waived its right of first refusal with respect to the first sale.

You will notice the buyer’s dilemma. The court said the following:

• An escrow agent has no duty to disclose the details or important terms, negative or otherwise, of documents excepted in the title policy
• By taking an exception for matters in the declaration, the title insurance company had successfully excepted from coverage every adverse matter that might appear in the declaration, including the right of first refusal
• The escrow agent also had no duty to disclose the shortcomings of the release document because his duties are limited to handling the funds properly

On the point of the viability of the release, there is a bit of inside baseball. Title insurance-savvy litigators may have seen a higher risk of the court holding the escrow agent responsible if they challenged the first sale. After all, the closer saw a defective release and disbursed funds anyway, arguably in violation of his duty with respect to the funds. By challenging the second sale but not the first sale, the propriety of the disbursements was left unchallenged and the challenged sale was positioned as a post-policy event, depriving the policyholder of lawyers who would have been paid by the title insurance company.

The shorthand message to all buyers is simple: No one is going to read these documents for you. In commercial transactions, buyers will often discourage their attorneys from billing for reading an entire condominium declaration and related documents and will trust to their own reading of the documents. In residential cases, very few buyers have their own attorneys and there is no one else in the transaction to read the declaration for them. Whether the lesson of the IQ case is frightening enough to cause buyers to hire lawyers and bring them to the closing is an open question. Similarly, it is an open question as to whether a buyer’s broker has an obligation to read these documents and point out their more important provisions to the buyer.

To avoid singing the buyers’ blues, contact experienced real estate counsel and instruct them to read the documents, or take the time to read the documents yourself with great care.

Today’s real estate tip is brought to you by Rick Smith, a LEED Accredited Professional and member of Bernstein Shur’s Real Estate Practice Group and Green Building Team. Stay tuned for more useful tips for real estate professionals.

For more information, contact Rick at rsmith@bernsteinshur.com or 603 623-8700 ext. 8829 or 207 774-1200.