Disclosures and Due Disclosures and Due Diligence in Diligence in

Residential Real Residential Real Estate TransactionsEstate Transactions

Scott M. Lucas & Matthew J. Scott M. Lucas & Matthew J. PfohlPfohlOlson & Lucas, P.A.Olson & Lucas, P.A.

IntroductionIntroduction

Disclosures to be made by Sellers – Disclosures to be made by Sellers – §20.2§20.2

Disclosures to be made by Brokers & Disclosures to be made by Brokers & Agents - §20.3Agents - §20.3

Due Diligence Concerns - §§20.4-20.9Due Diligence Concerns - §§20.4-20.9

p. 20-1p. 20-1

§20.2 Seller §20.2 Seller DisclosuresDisclosures

What Seller MUST What Seller MUST Disclose:Disclose:

Minn. Stat. § 513.55Minn. Stat. § 513.55

““All All materialmaterial facts of which the facts of which the seller is awareseller is aware that that could could adversely and significantlyadversely and significantly affect: affect:

An ordinary buyer’s An ordinary buyer’s use and enjoymentuse and enjoyment of the property, of the property, or:or:

Any Any intended useintended use of the property of which the of the property of which the seller is seller is awareaware””

Damage, physical defects, failing mechanical systems, Damage, physical defects, failing mechanical systems, water issues, construction mistakeswater issues, construction mistakes

P. 20-2P. 20-2

But…No liability if:But…No liability if:

Not within “personal knowledge”Not within “personal knowledge”

Based entirely on information from “qualified Based entirely on information from “qualified third party”third party”

Obtained only through inspection or Obtained only through inspection or observation of inaccessible parts of real estate observation of inaccessible parts of real estate oror

Could only be discovered by person with Could only be discovered by person with expertise in science or trade beyond expertise in science or trade beyond knowledge of Sellerknowledge of Seller

Minn. Stat. § 513.57, subd. 1Minn. Stat. § 513.57, subd. 1

Pp. 20-2 & 20-3Pp. 20-2 & 20-3

What does NOT need to be What does NOT need to be

disclosed:disclosed: If the occupant had AIDS or was HIV If the occupant had AIDS or was HIV

positivepositive

If someone committed suicide or died thereIf someone committed suicide or died there

Ghosts?Ghosts?

Neighborhood adult family home or Neighborhood adult family home or residential facilityresidential facility

Sex offendersSex offenders

P. 20-3P. 20-3

Contradictions Must Be Contradictions Must Be DisclosedDisclosed

If Seller obtains a copy of a report and knows If Seller obtains a copy of a report and knows of any material facts that contradict the of any material facts that contradict the information, those facts must be disclosed.information, those facts must be disclosed.

Buyers: Give sellers your report!Buyers: Give sellers your report!

Sellers: Obtain your own report?Sellers: Obtain your own report?

P. 20-4P. 20-4

In the Event of Non-In the Event of Non-DisclosureDisclosure

Sale Not Invalidated – Seek Sale Not Invalidated – Seek Damages and other Equitable reliefDamages and other Equitable relief

Rescission is an equitable remedyRescission is an equitable remedy

p. 20-5p. 20-5

Statue of LimitationsStatue of Limitations

Minn. Stat. § 513.57, subd. 2: Minn. Stat. § 513.57, subd. 2: Commence action within two years Commence action within two years after closing on the saleafter closing on the sale

Look for arbitration provisionLook for arbitration provision

P. 20-5P. 20-5

Relationship of Statute Relationship of Statute to Common Law Claimsto Common Law Claims

Per Minn. Stat. § 513.57, subd. 3: Per Minn. Stat. § 513.57, subd. 3:

Common law claims are NOT PRECLUDEDCommon law claims are NOT PRECLUDED

Negligent or Fraudulent MisrepresentationNegligent or Fraudulent Misrepresentation

Minnesota Consumer Fraud ActMinnesota Consumer Fraud Act

Estoppel, Unjust Enrichment, Breach of Estoppel, Unjust Enrichment, Breach of WarrantyWarranty

P. 20-5P. 20-5

DamagesDamages

Proof of alleged Damages is RequiredProof of alleged Damages is Required

Out of Pocket RuleOut of Pocket Rule Not the “cost to fix” damages Not the “cost to fix” damages Rather, FMV with the problem vs. FMV Rather, FMV with the problem vs. FMV

without the problemwithout the problem

Difficult to Prove?Difficult to Prove? Not “off the cuff”Not “off the cuff”

P. 20-6P. 20-6

Location of Wells / Location of Wells / Washington County Special Washington County Special

Construction AreaConstruction Area

Property within Washington CountyProperty within Washington County

Minn. Adm. Rules section 4725.3650Minn. Adm. Rules section 4725.3650

Minn. Stat. section 103I.236Minn. Stat. section 103I.236

Disclose wells even if served by Disclose wells even if served by municipal watermunicipal water

P. 20-13P. 20-13

§20.3 Licensee §20.3 Licensee DisclosuresDisclosures

GenerallyGenerally

Brokers and AgentsBrokers and Agents

P. 20-16

Material Facts Material Facts Concerning Condition Concerning Condition

of Propertyof Property Applicable TransactionsApplicable Transactions

Certain Facts are Non-MaterialCertain Facts are Non-Material

Information in Certain Written Reports Need Information in Certain Written Reports Need Not be DisclosedNot be Disclosed

Disclosure Must be Made of Contradictions Disclosure Must be Made of Contradictions in Written Reportsin Written Reports

Liability for Non-DisclosureLiability for Non-Disclosure

Pp. 20-20 to 20-22Pp. 20-20 to 20-22

§20.5 Due Diligence: §20.5 Due Diligence: Condition of the PropertyCondition of the Property

Property Property InspectionsInspections From Buyer’s perspective, advisable to From Buyer’s perspective, advisable to

includeinclude

Forms: Forms: MSBA Form 18MSBA Form 18 MAR “Inspection Contingency Addendum”MAR “Inspection Contingency Addendum”

If issues discovered, parties must reach an If issues discovered, parties must reach an agreement to address, or waive by a deadlineagreement to address, or waive by a deadline

P. 20-30P. 20-30

ARRANGE INSPECTION QUICKLY.ARRANGE INSPECTION QUICKLY.

Typically done on a short time frame. Typically done on a short time frame. Check the applicable deadlines right Check the applicable deadlines right

away.away.

Waived if not timely done. Waived if not timely done. P. 20-30P. 20-30

Government Mandated Government Mandated InspectionsInspections

Local ordinances should be reviewed; Local ordinances should be reviewed; some cities impose inspection some cities impose inspection requirements. requirements.

Some ordinances require immediate Some ordinances require immediate correction of hazardous conditions. correction of hazardous conditions.

Many ordinances available on the Many ordinances available on the Internet.Internet.

P. 20-31P. 20-31

Does Municipal Inspection Does Municipal Inspection Alter Seller Duty ? Alter Seller Duty ?

““unclear whether Minnesota’s unclear whether Minnesota’s Condition of the Property disclosure Condition of the Property disclosure law . . . allows a municipal code law . . . allows a municipal code inspection to serve as the third party inspection to serve as the third party inspection report. To conclude ‘yes’ is inspection report. To conclude ‘yes’ is a tenuous judgment.” Todd J. Anlauf, a tenuous judgment.” Todd J. Anlauf, Kimball Foster, and John D. RiceKimball Foster, and John D. Rice

P. 20-31P. 20-31

Environmental Environmental ConcernsConcerns

Phase I Environmental Site Assessment. Phase I Environmental Site Assessment.

Used if there are concerns about Used if there are concerns about hazardous waste or other hazardous waste or other environmental issues. environmental issues.

May lead to environmental testing. May lead to environmental testing.

Unusual for residential transactions.Unusual for residential transactions.

P. 20-31P. 20-31

Environmental Environmental Concerns . . .Concerns . . .

Radon: Buyer can ask for testing. Radon: Buyer can ask for testing.

Lead Paint: If the property was Lead Paint: If the property was constructed before 1978, the constructed before 1978, the Buyer is to have ten days to Buyer is to have ten days to investigate the possibility of the investigate the possibility of the presence of lead or lead paintpresence of lead or lead paint. .

P. 20-31, 32P. 20-31, 32

§ 20.6 Due Diligence: § 20.6 Due Diligence: TitleTitle

Objectives of Title ReviewObjectives of Title ReviewSeller to provide marketable title. Seller to provide marketable title.

““primary purpose of marketable title is primary purpose of marketable title is to protect the purchaser from the to protect the purchaser from the burden of litigation that may be burden of litigation that may be necessary to remove apparent or real necessary to remove apparent or real defects in the title” defects in the title” Glaser Glaser

P. 20-32P. 20-32

Another part of the title Another part of the title review process. . . review process. . .

make sure the property to be purchased make sure the property to be purchased will be suitable for client needs. will be suitable for client needs.

“ “Buyers should also consider whether Buyers should also consider whether easements, restrictions, covenants, easements, restrictions, covenants, agreements and other matters of record agreements and other matters of record would interfere with Buyer’s intended would interfere with Buyer’s intended use of the property . . .” Anlauf, Foster, use of the property . . .” Anlauf, Foster, Rice. Rice.

P. 20-32P. 20-32

EVIDENCE OF TITLEEVIDENCE OF TITLE

Seller furnishes either: Seller furnishes either: Updated abstract , orUpdated abstract , or a commitment to provide an owner’s a commitment to provide an owner’s

policy of title insurance. policy of title insurance. If there is any concern that Buyer If there is any concern that Buyer

will be called upon later to provide an will be called upon later to provide an abstract, Buyer should request abstract, Buyer should request updated abstract.updated abstract.

P. 20-32,33P. 20-32,33

Form of Title Form of Title CommitmentCommitment

Conditions section: Lists conditions of Conditions section: Lists conditions of coverage. coverage.

Schedule A describes the property, lists the Schedule A describes the property, lists the owner, names the insureds, and states the owner, names the insureds, and states the dollar value of the coverage amounts. dollar value of the coverage amounts.

Schedule B-I states the requirements that Schedule B-I states the requirements that the title insurer will impose to insure title. the title insurer will impose to insure title.

Schedule B-II states the exceptions from Schedule B-II states the exceptions from coverage. coverage.

P. 20-33P. 20-33

Making Title Making Title ObjectionsObjections

Timing of ObjectionsTiming of Objections

MAR Form “Purchase MAR Form “Purchase Agreement” :Agreement” :

“ “Seller shall use Seller’s best Seller shall use Seller’s best efforts to provide marketable title efforts to provide marketable title by the date of closing.”by the date of closing.”

P. 20-33P. 20-33

MSBA form : Specific timeframe. MSBA form : Specific timeframe. If an abstract is provided, Buyer has If an abstract is provided, Buyer has

ten days to either make title ten days to either make title objections, or order its own objections, or order its own commitment for a title insurance policy. commitment for a title insurance policy.

If Buyer receives a commitment, it has If Buyer receives a commitment, it has ten days from receipt of it to provide ten days from receipt of it to provide Seller with Buyer’s title objections. Seller with Buyer’s title objections.

Objections not timely made are waived. Objections not timely made are waived.

P. 20-33P. 20-33

Buyer’s Title Buyer’s Title Commitment ReviewCommitment Review

Provide written objections to the Provide written objections to the seller or seller’s counsel, and to the seller or seller’s counsel, and to the closing agent issuing the closing agent issuing the commitment. commitment.

Thoroughly review the commitment to Thoroughly review the commitment to determine which objections to make. determine which objections to make.

See materials – P. 20-34.See materials – P. 20-34.

Standard exception in Schedule B-II for Standard exception in Schedule B-II for “[a]ny . . . adverse circumstance “[a]ny . . . adverse circumstance affecting the Title that would be affecting the Title that would be disclosed by an accurate and complete disclosed by an accurate and complete survey of the Land.” survey of the Land.”

However, closing agents may delete that However, closing agents may delete that survey exception for residential survey exception for residential properties upon request, if a visual properties upon request, if a visual inspection of the property is made, or if a inspection of the property is made, or if a “plat drawing” is obtained. “plat drawing” is obtained.

P. 20-34P. 20-34

PRACTICE TIP: DELETE THE PRACTICE TIP: DELETE THE SURVEY EXCEPTION. SURVEY EXCEPTION.

§ 20.7 DUE DILIGENCE: § 20.7 DUE DILIGENCE: THE CLOSING THE CLOSING

PROCESS PROCESS Closing InstructionsClosing Instructions

Certain protections in the ALTA Certain protections in the ALTA form Closing Protection Letter, form Closing Protection Letter, discussed below, are based on discussed below, are based on protecting the owner or protecting the owner or mortgagee from the closing mortgagee from the closing agent’s failure to follow written agent’s failure to follow written closing instructions. closing instructions.

P. 20-36. P. 20-36.

TIMING: ALTA Closing Protection TIMING: ALTA Closing Protection Letter form requires that the Letter form requires that the “binder or commitment for the “binder or commitment for the issuance of a policy of title issuance of a policy of title insurance . . . must have been insurance . . . must have been received by you prior to the received by you prior to the transmission of your final closing transmission of your final closing instructions.”instructions.”

P. 20-36P. 20-36

The Closing Protection LetterThe Closing Protection Letter

Issued by the underwriter. Protects against: Issued by the underwriter. Protects against: ““Failure of the issuing agent or approved Failure of the issuing agent or approved

attorney to comply with your written closing attorney to comply with your written closing instructions to the extent that they relate instructions to the extent that they relate to . . . status of the title to said interest in land. to . . . status of the title to said interest in land. . . ” . . ”

“ “Fraud or dishonesty of the issuing agent or Fraud or dishonesty of the issuing agent or approved attorney in handling the funds or approved attorney in handling the funds or documents in connection with such closings to documents in connection with such closings to the extent such fraud or dishonesty relates to the extent such fraud or dishonesty relates to the status of the title to said interest in land or the status of the title to said interest in land or to the validity, enforceability, and priority of the to the validity, enforceability, and priority of the lien of said mortgage on said interest in land.” lien of said mortgage on said interest in land.” P. 20-37 P. 20-37

““A closing protection letter is typically issued A closing protection letter is typically issued by a title insurance underwriter ‘[t]o verify the by a title insurance underwriter ‘[t]o verify the agent's authority to issue the underwriter's agent's authority to issue the underwriter's policies and to make the financial resources of policies and to make the financial resources of the national title insurance underwriter the national title insurance underwriter available to indemnify lenders and purchasers available to indemnify lenders and purchasers for the local agent's errors or dishonesty with for the local agent's errors or dishonesty with escrow or closing funds.” escrow or closing funds.” New Freedom New Freedom Mortgage Corp. v. Globe Mortg. CorpMortgage Corp. v. Globe Mortg. Corp. 761 . 761 N.W.2d 832, 842 – 843 (Mich. Ct. App. 2008), N.W.2d 832, 842 – 843 (Mich. Ct. App. 2008), (emphasis added), quoting 2 PALOMAR, TITLE (emphasis added), quoting 2 PALOMAR, TITLE INSURANCE LAW, § 20:11.INSURANCE LAW, § 20:11.

P. 20-38. P. 20-38.