As a rule, the kinds of unanticipated circumstances that precipitate pre-closing disputes are matters for negotiation. For instance, suppose it comes to light during a transaction that a prior owner converted the garage to a family room without benefit of a building permit. If this were discovered on an inspection report, it would be grounds for the buyer’s disapproval of the condition of the property based on the report. If otherwise discovered and disclosed as a latent material defect, it would certainly be grounds for rescission of the contract based on a mutual mistake. Either way, the deal is going to die unless the parties can negotiate around the problem.
The seller may not see the problem as theirs alone if they did not do the remodel. That, however, is not relevant. As between this buyer and this seller, the problem is the seller’s because the buyer can walk away from the deal based on the discovery of the problem. Allowing this buyer to walk away does nothing for the seller because once the problem is known it must be remedied or disclosed to all potential buyers. The seller, therefore, is going to have to deal with the issue.
One potential solution is for the seller to obtain the necessary permits prior to close. Who pays the cost of obtaining the permits is a matter of negotiation, but the seller has little to bargain with given that the purchase price assumed a legal family room. Still, costs are always negotiable. However the negotiations come out, it is usually the agent’s job to reduce the agreement to writing. This is where real estate agents often come to grief.
The tendency once agreement has been reached regarding a dispute is to scribble out something like “Seller to obtain permits for family room” and let it go at that. This manner of resolving pre-closing disputes is a great disservice to clients. Agents are not lawyers, but they can learn to draft simple agreements that make clear the actual resolution of the dispute.
An agreement resolving a pre-closing dispute should start with a simple statement of the purpose of agreement. Second, the resolution of the dispute should be set out in clear terms of what each party has agreed to do and when they agree to do it. Finally, and this is where real estate agents almost always fall short, fail-safe mechanisms should be included so that if things do not go as planned future disputes are avoided.
Fail safe mechanisms are based on a close examination of the promises made in the agreement resolving the pre-closing dispute. For instance, if the seller has agreed to obtain the necessary building permits at their sole expense prior to the closing date, three potential problems are immediately apparent. The seller may find they cannot get the permit at all, they may find they can get them but at too great a cost, or they may find they can get them at an acceptable cost but not before the closing date. Each of these potential problems should be anticipated and the resolution for each potential problem included in the addendum resolving the problem.
An agreement to resolve a potential dispute over a family room having been built without a permit might look something like this:
“The parties to this agreement have discovered that unbeknownst to either party a prior owner converted the garage to a family room without obtaining building permits. To resolve this problem, the parties agree that the seller will use their best efforts to obtain the required permits prior to the closing date. The costs of obtaining the necessary permits, not to exceed $______ , will be paid by the seller. Should the regulatory authority refuse to issue the permits or it otherwise becomes impossible to establish the legality of the family room prior to the closing date, or any extension thereof agreeable to the parties, the transaction shall terminate and all earnest money be refunded to the buyers. If the cost of obtaining the necessary permits exceeds the amount specified above, the buyer, upon notice of the true cost, may elect to pay the difference and proceed to closing or terminate the transaction and have all earnest money refunded. If the permits are not obtained prior to the closing date, the closing date shall be automatically extended for _____ days. Thereafter, the closing date shall be extended only by mutual agreement of buyer and seller and if not so extended, the transaction shall automatically terminate and all earnest shall be refunded to the buyer.”
Certainly, it is easier to write “Seller to obtain permits for family room” than draft a whole paragraph. But scribbling a “seller to” sentence does not really define or handle the potential dispute. Some may object that so detailed an agreement is practicing law, but they miss the point. What is written above is a negotiated business solution to a known problem. All that is addressed are business problems raised by the lack of permits, not the legal consequences of not having the permits or the legal effect of closing without them.
Business expertise includes assessing a problem and helping the parties find a business solution. The actual terms of the solution, for instance, whether the buyer can elect to pay the difference if the permits cost more than expected, does not require legal analysis. It is simply the result of the business negotiations. The agent’s role is to help the parties by anticipating real world, not legal, problems. It is the parties who, with that help, find the solutions. Writing the document that memorializes the solution found by the parties is easy once the parties have decided how they want to handle the situation.
This manner of doing business traditionally is not taught, or even supported, in the industry. That is a consequence of the “sales” origin of the business. A modern professional services approach, however, demands more than simply filling in the blanks of a one-size-fits-all form. Professional service means bringing training, expertise and experience to bear on the client’s undertaking. When that undertaking is closing a real estate transaction, the ability to help the parties negotiate around problems is going to be critical.
A professional service approach means helping the parties understand the problem. For instance, understanding that an un-permitted addition can mean expenses and difficulty in the future if not corrected. That knowledge requires no legal training or analysis. It is something known to anyone familiar with real estate. It is the agent’s duty to share business knowledge. Once it is shared, it is the parties, with their agents’ help, who must decide on the solution.
It is real estate training, expertise and experience that are needed to help parties find potential solutions. This is done by helping them understand the business, not legal, ramifications of the various possible solutions. Dispute resolution is first a matter of negotiation, not the assertion of legal rights. As long as the parties are seeking business solutions by negotiation, the agents are within the scope of their agency and expertise.
Pre-closing disputes follow a predictable pattern. First, some problem arises prior to closing. The problem can be as simple as a misunderstanding over a document or as serious as an anticipatory breach by the other party. Whatever the problem, the first decision is always: do the parties want to continue? If they do not want to continue, it is time to advise legal consultation. If they do, it is time to negotiate a solution.
Once a pre-closing problem is defined and a solution is negotiated, it is time to memorialize the solutions. Real solutions require “fail-safe” provisions so that if the solution proves impossible or more burdensome than anticipated, the parties know what happens next. It is really quite simple if the real estate professionals involved approach the problem as a business problem amendable to rational deconstruction and resolution.
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