Buyers (Really Need To) Beware!

Tucker Arensberg, P.C.
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The Pennsylvania Association of Realtors (“PAR”) Standard Agreement for the Sale of Real Estate (“Agreement of Sale”) is probably the most widely used Agreement of Sale for residential real estate transactions across the Commonwealth. By and large, it has been an excellent tool that was well designed to facilitate transactions, protect the rights of buyers and sellers, and minimize risks to agents.

But. . .

Some of the January, 2019 changes to the PAR Agreement of Sale are curious and should give us pause as we counsel our clients. One major change is found the “Titles, Surveys and Costs” paragraph (formerly paragraph 17), new paragraph 14(A), which states:

Within ___ days (7, if not specified) from the Execution Date of this Agreement, the Buyer will order from a reputable title company for delivery to Seller, a comprehensive title report on the Property. Upon receipt, Buyer will deliver a free copy of the title report to Seller.

Perhaps one reason for this change is to identify potential clouds, or adverse claims, against the title to the Property earlier in the transaction, allowing the title agent and seller more time to resolve any concerns. It is very common across the Commonwealth for buyers, upon the advice of their real estate agents, to wait until after the inspections are completed and either repairs or credits are negotiated, or the contract is terminated, before requesting a title search. One justification of this practice, as explained by Realtors®, is that inspections are a major reason transactions fail. Agents do not want their buyers to incur the cost of a title search until any inspection issues are resolved. As a title agent, commissioning a title search as early as possible in the transaction makes good sense. Is this new language the right way to change this practice?

  1. Who orders the title search and when?

Ask title agents across the Commonwealth and you will likely find that either the buyer’s agent or lender, and sometimes an attorney, contacts the title agency and requests the title search to be initiated. Buyers typically do not understand much about title insurance and rely on their agents or lenders to walk them through this process. For the unwary buyers’ agent, the default timeframe could be a potential pitfall, especially if the buyers use an affiliated title agency. Perhaps agents will address this potential problem by inserting a date well beyond the timing of the Inspection Contingency.

  1. From what entity is the “title report” being ordered?

Depending on where your practice is located, title work may be ordered from a title agent, an attorney, or directly through the title company’s underwriter. Perhaps the language requiring title to be ordered from the “title company” will be interpreted to generically mean the title insurance company, title agent, or attorney; perhaps in its use, real estate practitioners will focus on the fact that the title work was ordered, received and the transaction closed. What makes a title company or agency “reputable” remains to be seen.

  1. What is a comprehensive title report?

The concept of ordering a “comprehensive title report” is particularly troubling. The Agreement of Sale does not define what constitutes a “comprehensive title report,” and it is not a phrase that has clear meaning within the title insurance industry. Title searches can be commissioned in a number of ways, yielding different products but typically substantially similar results. Here are two examples.

Many title agents contact a local or regional abstract company to perform a title search. As a result of the search, the title agency would receive a copy of handwritten notes from the abstractor detailing the chain of title for at least the past 60 years, identifying potential out-sales from the parent tract of land, identifying recorded subdivision plans, easements, judgments, lawsuits, and a host of other filings that may (or may not) affect the quality of the property’s title. Depending on the title agency’s practice and preference, the abstractor might provide copies of some or all of these items from the record. The abstractor’s notes and the copies provide a fairly comprehensive report detailing the history of the property’s title. The title agent will assimilate the information from that report and issue a title commitment.

On the other hand, many of the major title insurance companies offer a search service to their agents. Through these separate services, the title agent will request a title search on the property. The search will be performed and a summary report of the findings will be provided to the title agent. Some title companies include the vesting deed and many or all of the documents of record, with the summary. Other title companies only provide the record documents if the title agent pays extra for them. The title insurance company issues a preliminary or draft title commitment that the title agent will review against the summary and amend as appropriate.

Does the summary report that the title agent receives in these situations constitute a “comprehensive title report”?

  1. Why does the Seller need a copy of the title report?

What will sellers do with a copy of the title report? Is a seller, who is neither an attorney nor title agent, expected to review and understand the title report? Is a listing agent, who also is not an attorney or title agent, going to be expected to review the title report with the sellers and advise them about what steps the sellers need to take to meet their obligations found in Paragraph 14(E) of the Agreement of Sale?

After they review the title reports or summaries, title agents prepare title commitments. A title commitment is a promise from the title insurance company to insure the title of the property, and it identifies the terms, conditions and exclusions from coverage that may or will appear in the final policy. The title commitment contains a lot of important information for buyers to review, but it also has information that may be helpful for sellers. Schedule B-1 of the title commitment lists requirements that have to be satisfied in order for the transaction to close, and Schedule B-2 of the title commitment identifies items of record that will be excepted from coverage. For example, if the buyer’s lender requires the title agency to insure that it will be the first place lienholder, Schedule B-1 will list certain matters of record that are required to be cleared and removed in order for the transaction to close. This is where outstanding property taxes, current or prior-owner mortgages, outstanding judgments and liens, and other claims that might affect who has priority will be listed.

Depending on how real estate is practiced in your area, sellers currently may or may not have access to some part of the title work. That practice is changing under these revisions; buyers are being compelled to share title work with the sellers. However, the title commitment, which may be the most useful document for a seller to review, is not part of the “comprehensive title report.”

  1. What if the title agent does not give the buyer any of the documents provided as a result of the title search?

Buyers rarely get copies of abstracts, title reports or title summaries. In some areas, buyers are not even given copies of the title commitments. If the title insurance agent, who is not a party to the Agreement of Sale, does not provide the buyer with a copy of the title abstract, title report or title summary, is the buyer in breach? If the title agent provides a copy of just the title commitment to the buyer and the buyer provides it to the seller, has the buyer actually satisfied the buyer’s obligations under the Agreement of Sale?

For example, would a seller be permitted to terminate an Agreement of Sale if the title search was ordered on day 9, there were no adverse claims against the property, and it was owned free-and-clear by the sellers? Alternatively, if the title work was ordered the day after the Execution Date, there were no adverse claims against the property and no mortgages to be satisfied by sellers, but the buyers never provided any documentation about the title work to the sellers, would the sellers be permitted to terminate the agreement even if the buyers were ready, willing and able to close on time?

The PAR Agreement of Sale makes time of the essence and both the failure to order the title search within 7 days of the Execution Date, and the failure to provide a copy of the ‘comprehensive title report’ would, arguably, be breaches that would allow seller to terminate. If the seller terminated under either of these scenarios, would the seller be permitted to retain the buyer’s deposit money?

Two simple sentences added to the PAR Agreement of Sale have potentially and remarkably shifted the responsibilities of buyers and buyers’ agents, and created potential liability where none previously existed. Only time will tell how the industry will adapt to these changes, but until then buyers and buyers’ agents really need to beware.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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