Reading the Preliminary Title Report

Quick Glimpse of This Case:

The buyer made an offer on a house, contingent upon him selling his present home. The sellers responded “no contingency offers” so the buyer wrote up another offer without one. Sellers accepted and escrow was opened. Buyer was notified of acceptance and put his home on the market immediately. He didn’t want to make payments on two homes.

The sellers advised their agent in confidence that they owed money to the IRS and had a few other court-ordered settlements on record against them. The sellers asked their agent to hold off delivering the Preliminary Title Report (PTR) to the buyer so they might clear these off title. The agent, who was also representing the buyer, agreed to wait a few weeks before showing the PTR to the buyer. The buyer was unaware of any of this and was assured the transaction was proceeding as planned.

The buyer’s home sold. A few days away from closing escrow on the buyer’s home, the buyer asked about the missing PTR on his new home. With one glance at the PTR, it was clear that the sellers were not able to remove the money judgments on title, and there was insufficient equity to pay these liens. The buyer was compelled to complete the sale on his present residence, but had no home to move into. Left homeless, he consulted an attorney.

Advisory:

The licensee is the fiduciary of the client, and the licensee’s duties of utmost care, integrity, honesty and loyalty are spelled out in the agency disclosure. The licensee is expected to be knowledgeable in real estate matters. The Preliminary Title Report, or PTR, is a snapshot of the recorded liens, easements, and other matters of records which affect the property.

The delivery of the PTR to the buyer is typically called for in the sales contract. It is an agent’s duty to take a look at the PTR to discover any potential problems. An agent should call any such issues to the client’s attention. In this case it was the lack of equity and the seriousness of the seller’s liens which raised a red flag. This should have been disclosed to the buyer. Even though the seller’s debts are a confidential matter, if such debts will prevent escrow from closing, or delay the close, it is a material fact affecting the value or desirability of the property.

There are lesser issues of title which can be a red flag to the buyers. As an example, if the buyer indicates an intention to put a pool in the back yard, and the PTR shows an easement for an underground utility pipe in the area, the problem is obvious. Many title issues can be resolved with enough time. For example: Is there a name on title (like an ex-spouse) who is not part of the signed sales agreement? Will the present lender be willing to negotiate a short payoff on the outstanding liens? Is there an easement for a driveway or parking?

In many cases the PTR indicates the existence of another governing document by recorded reference to it. The presence of a lease may be indicated by a recorded memorandum. Covenants, Conditions, and Restrictions (CC&R’s) are typically indicated by reference. Agents should ask the title company for a copy of such further documents.

Summary Points:

Is an agent required to interpret the PTR? No. If the agent or client has questions, the appropriate title officer should be contacted for answers. Put your client in touch with the title officer. If you relay such information, be sure to quote your source and whether you have verified it or not.

Is the PTR accurate? No. That’s why it’s called “preliminary”. It is an offer from the Title Company to issue a policy of title insurance. These reports are updated every few weeks, so the PTR you get today might have been run last month. Yesterday’s new lien may not show up at all. It is also true that a recorded Deed of Trust reflects the original amount of the Note, not necessarily the current balance.

Should agents advise the buyers to read the PTR? Yes. Buyers may not be aware that the matters of title, which are on record, can and do impact their ability to use and enjoy the property. This same standard of care applies to agents who sell properties that have Covenants, Conditions, and Restrictions (CC&R’s) recorded. One agent carelessly told his buyers to “read these CC&R’s only when you want to fall asleep” and was sued for this poor advice. Condos, townhouses, and PUD’s are governed by such documents. Agents should let their clients know how important it is to understand what they can and cannot do with the property they are buying.

Good Luck!

Cari Lynn Pace

For further information, see Easements blog from April 10, 2008

Who is Your Client?

Quick glimpse of this case: A buyer made an offer which included the right to assign the purchase agreement. Using the phrase “or assignee” might indicate that the buyer is scouting out property for other buyers. The scout ties up the property and then finds a replacement buyer, with the intent of making a profit or a partnership purchase. No problem so far.

This contract between the seller and the scout was ratified and escrow was opened. Shortly thereafter, the scout found a replacement buyer for the property. The scout turned over his purchase rights to this buyer, but never did so with any formal agreement. There was no assignment of the contract. The scout simply substituted the buyer’s name into all disclosure documents and removals of contingencies.

The agent, who had written up the agreement and started the transaction and escrow with the scout, soon knew there was to be a different buyer taking title. The agent, however, continued to deliver disclosures and contingency removals to the scout. The scout forwarded these documents to the assignee buyer. This buyer, relying on the scout, initialed and signed as instructed. The agent had no contact with the buyer at all, conducting business only with the scout.

Now it gets really interesting: The purchase price was lowered during the escrow. Rather than use an Addendum, the agent redrafted page one of the purchase agreement to reflect the negotiated price. The agent took off the scout’s name and put the buyer’s name into the paperwork. Buyer signed. Seller re-signed with the new buyer and escrow continued. The agency relationship paragraph confirmed the agent now represented the newly-named buyer. Keep in mind that the buyer, not the scout, signed this contract. The buyer still had no contact with the agent, relying totally upon the scout for advice and assistance.

The buyer closed escrow, and took title. When later problems surfaced between the buyer and the scout, the agent was brought into the dispute. The agent protested “I never met the buyer, I never sent them anything, and I don’t know anything about them, so I don’t represent them. I only represented the scout buyer.” Would you agree with this defense?

Advisory: There are problems when an agent fills in the “confirmation of agency” paragraph, indicating the fiduciary duty to represent the buyer, but never has contact with them. Agency Law is clear that our duties of “utmost care, integrity, honesty, and loyalty” exist once agency is created. Can we do this if we never have contact with the client? Are we obligated to represent clients we have never met? And if we never have any contact, how could agency be created?

In fact, this transaction demonstrates how paperwork created the agency, not the actions of the agent or client. The fiduciary duties existed from agent to buyer, even though there was no client contact. When the client suffered damages, the agent was implicated.

Summary: This agent did nothing to represent the buyer, even though the agent’s name was on the line. The agent was unable to show there was any care, integrity, honesty, or loyalty given to the buyer. The agent paid dearly for this mistake. In my opinion, the agent was bound to be the fiduciary once the purchase agreement was signed with the agent confirmation.

What if: Yes, you can be involved in a transaction without creating agency, but you must be careful about your words and actions, as well as disavow any agency relationship in the paperwork. If “no agency” is your goal, be very clear.

Final Advisory: If your contract allows the buyer to substitute an assignee, it’s advisable to use a written assignment, or a substitution of contract if all parties agree. Your escrow holder needs to be involved. Get a legal opinion to make sure it’s done properly.

Good luck!
Cari Lynn Pace

Next column: Agent Sued for Not Covering Prelim with Buyer

Easements: Should You Know What They Mean?

Quick glimpse of this case: An agent showed a home which had a greenhouse. The agent said "There's a recorded easement for the greenhouse over the neighbor's property line. It's in the Preliminary Title Report." Agent delivered PTR, buyer signed off on it, purchased the home and greenhouse, and didn't ask any further questions.

The buyer didn't get along with the neighbor. Neighbor planted trees around the greenhouse, blocking light. Buyer thought they "owned" the property under the greenhouse, and could remove the trees. Buyers were told by their attorney what their easement entitled them to do. Neighbor kept trees. Buyer sued agent for "not interpreting" easement.

Agents have been sued for misrepresenting the boundaries of a property, no surprise here! What is dismaying is that many cases expect the agent to "investigate" and "interpret" the easements. This isn't in our job description.

Advisory: Easements can be confusing and very technical. Attorneys are the best at interpreting easements and the rights that go with them. Many title officers are qualified to do this as well. For licensees, the best course of action is to obtain the Preliminary Title Report and read it over. Deliver it to your clients and go over it with them, or instruct them to read it and check in with you with their questions. Most sales contracts contain a standard "built-in" contingency regarding the buyer approving the title report and matters affecting title. Since this issue is important enough to be part of every purchase agreement, make sure the buyers read the PTR documents.

Summary Points: It's not a licensee's job to interpret what an easement entitles someone to do or not do. It's your job to know 1) that easements certainly do impact the use of the property and 2) advise your buyers of that fact. Follow up by 3) instructing them to read the PTR and 4) encouraging them to ask questions. If there is anything they don't understand, get title issue professionals to answer. The final advice is 5) refrain from interpreting or making statements about the easement, unless you are quoting your source and explaining if you have personally verified the information or not. Buyers rely on what you say.

What if: Okay, so you read the PTR and find yourself confused. Your client is confused, too. No problem. Call the title company and ask your questions. Put your client on the line in a conference call. Doing this assures you that the source of the information is not you, it is the title officer. If there are indications that the property has some further or referenced covenenats, conditions, restrictions, or recorded rules, regulations, etc. ask the title company to research and get you and your client a copy of these. Read these additional title documents, as they are material facts which can affect the value or desireability of the property. Again, if you and your client don't understand what you read, you and your client can and should ask questions of the title company. Email works just as well as telephone in this regard. Send a BCC to yourself so you have a record of your email communications with your client and the title officer.

Perhaps you want to get the information yourself, and tell your clients what it means to them. Be careful! If the title officer gives you information, and you relay that information to your clients, be sure to tell your clients who gave you the data and that you didn't verify it yourself. If you interpret the issues of title, you are reaching beyond your duties as a real estate licensee and opening yourself up to risk.

Next column: Who Is Your Client?