Illinois REALTOR®: Legal Update

October 2011

A good attorney can be a deal fixer

...and not a deal killer

  • Online only: Title issues and who pays for the survey

Elizabeth A. Urbance  |  IAR Legal Hotline Attorney; Associate, Sorling, Northrup, Hanna, Cullen & Cochran, Ltd.

It is plain to see from the excerpted language that introduces the three real estate form contracts from various parts of the state that the real estate sales transaction is a legal one with legal consequences. (Emphasis added.)

Real estate licensees are the experts with regard to marketing the property for sale and helping buyers to identify properties that fit their needs in order to bring the sellers and buyers together and hopefully consummate the sale. Real estate professionals serve a very valuable function when sharing their expertise about the market place with their selling and buying clients. They work very hard and they are constantly educating themselves to maintain this expertise.

However, no matter how savvy or well-educated the real estate professional, situations arise where other experts are needed to assist in the real estate sales transaction. If a home has faulty wiring, the real estate agent refers his client to an electrician. If the plumbing needs work, the agent suggests a licensed plumber. Sometimes questions arise that involve the contractual agreement between the seller and the buyer. When these legal questions arise concerning the contract send your client to the “expert,” their attorney.

Legal Pitfalls

We will spend some time in this article identifying some of the areas involved in the real estate sales transaction that might call for legal assistance. It’s important to note that this article addresses the sale transaction only, not rental agreements. As the real estate professional knows, real estate transactions are not getting any simpler and recommending good legal counsel to your clients (if they don’t already have one) can help you in your business and serve your clients’ best interests at the same time. A good attorney can surely be a deal fixer and not a deal “killer.”

Distressed Sales

This is of particular importance in this era of distressed sales. Many times the one who needs competent legal advice most of all is the distressed seller who is underwater on his mortgage. Note that the form purchase contract in your area might not cover some of the issues that arise in the distressed sale and both sellers and buyers could benefit from good legal advice to help the sellers, buyers and their respective agents navigate the process.

For example, the distressed seller wants to know how the sale affects his situation with his lender. Is the lender releasing the distressed seller from all liability or is the seller only being released from the mortgage (security interest) and not the note (loan) resulting in the seller’s continuing responsibility to pay the balance due on the note (the deficiency amount)? On the other hand, the buyer might want language in the contract that delays the timing for delivering the earnest money until the seller’s lender approves the contract to purchase the short sale property. The buyer might also want some “out” provisions if the process is taking too long.

Legal Issues from the Outset

Now let’s review the overall process from the very beginning. When the listing agent is taking the listing of his seller client it is important to assess possible legal issues early on. Suppose your seller client is asking you, the listing agent, how to complete the forms under the Residential Real Property Disclosure Act, the Radon Awareness Act and/or the federal lead-based paint regulations (for pre-1978 properties). While it would be appropriate for you to supply these forms (and required pamphlets) to your seller client you must not advise them how to answer the questions.

The seller must complete these disclosure forms to the best of their actual knowledge and if the seller has questions beyond that, the seller should be directed to their attorney for specific advice. You might keep in mind that even the distressed, and sometimes disinterested, seller trying to sell his home through a short sale has a duty to complete the “regular” disclosure forms and provide them to the buyers. (On the other hand, the REO/bank owner selling a repossessed property would only need to provide the lead based paint form and pamphlet for pre-1978 listings and would not need to provide the residential disclosure form or the radon form). That is just the very beginning of the sales process.

Use of the Form Sales Contract

Now let’s assume the seller and buyer have agreed to terms using the form sales contract that you provided them and that is the one commonly used in your community. [This is allowable under the holding in The Chicago Bar Association et al. v. Quinlan and Tyson, Inc. and the holding in the case allows real estate salespeople to complete the contract by providing business and factual information by filling in the blanks in the form contract that is commonly used in that community. This holding does not allow real estate salespeople to draft substantive contract language beyond the business and factual information.]

During the contract process, what are some of the issues that might arise and when should you advise your client to seek legal counsel? Note that if you are in the northern portion of Illinois and your form contract is the Multi-Board 5.0 Contract referred to earlier, the parties typically negotiate the contract terms and the attorneys for the parties become involved during the “attorney review period.” This is usually where legal issues are addressed and attorneys are often involved throughout the process from the point of attorney review. While I don’t have empirical data to support this statement, I don’t think, except for certain areas, that attorneys are involved as often south of I-80. However, legal issues still arise.


Short Appraisal and Financing Contingencies

Let’s spend a little time reviewing some of the issues that might come up either before or after signing the contract. One possible area of legal concern involves the financing provisions. What if the buyer wants a loan for 80% of the purchase price and the home does not appraise for the purchase price? Also, does the contract call for 80% of purchase price or 80% loan-to-value? 

Unfortunately, short appraisals are a fairly common problem in today’s marketplace. Sometimes the contract will have an appraisal contingency that is separate and apart from the financing contingency. Buyers might want this appraisal contingency in addition to the financing contingency. The buyer’s lender might agree to lend the buyer the money even if the property does not appraise for the purchase price. The lender will be concerned about the security of their loan and perhaps their ability to sell the loan. The buyer will be concerned about the value of the investment they are about to make.

The buyer should be referred to their attorney on this question and ideally make selections prior to finalizing the contract (unless there is some ability to alter them during attorney review). Once those contingencies are selected and have become part of the contract, and a disagreement ensues over what the buyer’s options may or may not be, it is time to recommend legal counsel to your client for specific advice about the contract terms and the client’s legal position.

Contract Negotiations

There are other legal issues that arise during contract negotiations and while awaiting closing. This article has only considered a few examples. If there is an attorney review period in the contract many of these issues will be addressed at that time. If not, it is important for the agent to recognize when a question is a legal one and not one that involves the brokerage aspects of the transaction.

• What about a seller who wants to hold-over after closing?
• What about questions with regard to real estate tax pro-rations or would a real estate tax letter be better for your client?
• What about options when issues arise from the property inspection?
• What if there are extreme delays in a short sale transaction?

Breakout Text: 

3 SAMPLE CONTRACTS:

Example #1: Multi-Board Residential Real Estate Contract 5.0

1. Multi-Board 5.0 may not be altered in any manner except to fill in the blanks.

2. In providing Multi-Board Contract 5.0 for use, neither IRELA (Illinois Real Estate Lawyers Association) nor the approving real estate boards are furnishing legal advice. Anyone using Multi-Board Contract 5.0 should do so only in consultation with a qualified attorney….

[Attachment to Multi-Board Contract 5.0]


Example #2: Capital Area Association of REALTORS® Contract for Purchase of Residential Real Estate

THIS FORM OF AGREEMENT WHEN FILLED IN AND EXECUTED BY BOTH BUYER AND SELLER IS INTENDED TO BECOME A BINDING REAL ESTATE CONTRACT AND THE PARTIES MAY WISH TO SEEK LEGAL COUNSEL.


Example #3: REALTOR® Association of Southwestern Illinois Contract to Purchase Form

THIS IS A LEGALLY BINDING CONTRACT; IF NOT UNDERSTOOD, SEEK COMPETENT LEGAL ADVICE. 

Copyright Illinois Association of REALTORS®. This content cannot be reprinted in parts or in its entirety without expressed written consent to the Illinois Association of REALTORS®.