What happens when a seller of property executes a contract in the wrong capacity?
Individual Property Owners
If an individual is buying or selling a piece of property, the individual should execute the sales contract by signing just his name. Parties will sometimes, though, sign a contract in the wrong capacity. For example, if a seller owns a property personally, but he signs a purchase agreement as though the seller is the corporation of which he is president, then the contract is unenforceable. The corporation didn’t own the property, making that signature invalid. The owner didn’t sign the contract personally or individually. There is not a valid signature. If the parties don’t want to correct the mistake, or one (or both) of the parties does not want to move forward, the contract is unenforceable.
Authorized Agents or Representatives
If a corporation or some other entity owns the property, the person signing the contract on behalf of the company must reflect that representative capacity in the signature block of the contract. Authorized representatives may sign on behalf of corporations, partnerships, limited partnerships, and limited liability companies. Typically, the closing attorney in such a transaction will want a copy of the legal documents for the entity or a corporate resolution confirming the authority of the person to act in a representative capacity.
Executors, Administrators, Trustees and Guardians
Contracts signed by executors, administrators, trustees and guardians must identify the capacity in which a person is signing. The representative must name the person or entity being represented on the face of the contract and show that they are signing the contract in a representative capacity. If the representative relationship is not clearly disclosed on the contract, the contract could be enforced against the individual acting as the agent, representative, trustee, or guardian and not against the person or entity being represented.
Persons Whose Names Have Changed
Generally, when a seller’s name on the purchase and sale agreement is different from how it appears on the deed recorded in the land records, a closing attorney will require the seller to bring to the closing for verification her marriage license, divorce decree, or other official name-changing document, and a photo identification reflecting the seller’s new name. Once the name change is verified, a name affidavit stating that the named persons are one and the same is included in the recital section of the property deed. Lastly, closing attorneys generally require that the seller sign the deed and purchase and sale agreement with the new legal name, followed by “formally known as [or f.k.a.] _____________ [previous legal last name].” The sample signature block set forth below may be used to indicate a name change: Seller: /s/ Sally Smith Jones Sally Smith Jones, f.k.a. Sally Smith
Using a Power of Attorney
An individual who has been given a power of attorney may sign a contract on behalf of any individual party who has the capacity to enter into a contract. Since a contract for the sale of land must be in writing, the power of attorney giving someone the authority to sign a real estate contract on someone else’s behalf also must be in writing.
Georgia law also requires that the power of attorney be signed and sealed by a notary public and separately witnessed if the power of attorney is being given to buy or sell land. Generally, a power of attorney to sign a contract is executed before a party signs a real estate agreement on behalf of an absent party. However, in some rare instances, a party who is not authorized to sign an agreement will do so on behalf of an absent party without a power of attorney. If such an instance occurs, the contract will generally be void and unenforceable because the signatory did not have the proper authority to consummate the transaction. However, the party with the proper authority may ratify the contract after it has been signed by creating a power of attorney with a retroactive effect. Normally, in closing real estate transactions, the closing attorney is going to ask for the documents evidencing the power of attorney’s authority to execute the agreement on behalf of the absent party and recommended practice is for a party to grant the representative a formal power of attorney that expressly empowers the representative to execute a sales contract for a particular piece of property. If such a power of attorney is executed, the terms of the power of attorney should describe the property with the same specificity as the contract itself. Although the power of attorney may include only a general description of the property, title insurance companies are reluctant to accept such general authority for a representative to act.
Nevertheless, it is best if the power of attorney state that the representative has the express power to sign mortgage loan documents, if this is going to be the case. Lenders and title insurance companies may have their own preferred form for powers of attorney and require that they are used. While any legally enforceable power of attorney should do, it may make the transaction smoother to first check with the lender’s closing attorney or title insurance company to determine if they have a preferred form.
Consequences of an Insufficient Power of Attorney
A party who signs a contract based on an insufficient or ineffective power of attorney is not bound to the contract. Individuals who deal with representatives in real estate contracts should carefully examine the representative’s authority to act. If there is a written power of attorney, the party giving the power of attorney should be contacted, if possible, to confirm its authenticity. The parties may also attach a copy of the power of attorney to the sales contract. A power of attorney must be effective at the time it is being exercised. If the power of attorney is very old, it is best to verify that it is still valid. The power of attorney must be signed by the property owners of record. Further, the power of attorney must contain a provision that allows the agent to execute a deed of transfer of ownership to the property as well as the power to negotiate the terms of the sale. A power of attorney terminates by express revocation, by the appointment of a new agent, or by the death of the principal or agent. If a person acting in a representative capacity signs a contract based on a power of attorney and the power of attorney does not actually give the representative the authority to enter into the contract, the other party to the contract cannot sue the representative for a breach of authority if that other party could have protected himself by taking ordinary care, such as reviewing the power of attorney or contacting the party who gave the power of attorney.
Source: Weissman, Seth. The Red Book on Real Estate Contracts in Georgia (pp. 299-307). BookBaby. Kindle Edition.
Injuries to potential buyers and brokers while viewing property are not uncommon. This article explores the liability of owners to invitees to a resale property and to houses under construction.
Open Houses and Showings
Homeowners are generally responsible for exercising reasonable care to make a property safe for those invited onto it. This general duty to make a property reasonably safe includes repairing dangerous conditions that are known or could be reasonably discovered by the homeowner or warning guests of their existence.
However, to recover for an injury suffered on and because of someone else’s property, the injured party must have been exercising “ordinary care” when they were nonetheless hurt.
Georgia common law follows a modified comparative theory of negligence, where the law aims to place the burden of an injury on the party best situated to have avoided it. In other words, an injured party can only recover damages for an injury if the party was comparatively less at fault for the injury than the person being sued. The law only requires that the owner or occupier of land ensure that the property is safe enough that a person who does manage to hurt herself is comparatively more to blame for her injury than the owner or occupier of the land.
Does a property owner owe a special duty to someone who may come on to listed real estate solely because of having seen a “For Sale” sign. This issue came up recently in two separate instances in which homes were listed for sale and “For Sale” signs were placed in the yards. Two different buyers saw the signs and decided to walk onto the properties on their own to have a look around. Both suffered significant injuries when, for one a deck, and for the other a stairway fall. They both sued, claiming that the owners owed them a duty to warn about the defective conditions; even though the owners had no idea these prospects were on the properties. As if often the case, there are two appellate decisions in Georgia addressing similar issues, both of which reach opposite conclusions.
The safest course is for owners to post warnings or rope off areas of the property that might be unsafe, no later than when a “For Sale” sign is placed on their property.
How do you get rid of uninvited people on your property? How about guests that have overstayed their welcome? Do you call the sheriff or go to court? It depends on the situation.
What is a Squatter?
A squatter is someone who occupies a property or area of land without lawful permission and has the intention of living there as if they were the owner.
What is the Relationship Between a Squatter and Adverse Possession?
Adverse possession is the set of legal elements that give a squatter the right to gain legal title of a property. The terms adverse possession and squatter’s rights are often used interchangeably. It takes at least 7 years (if the squatter acts under color of title) or 20 years of exclusive, actual, open (visible), hostile (no permission) and continuous use by the squatter to satisfy the legal requirements to gain title by adverse possession. It is difficult at best.
What is the Difference Between a Squatter and a Trespasser?
A trespasser is someone that knowingly enters someone’s house, building or land without permission or authorization, but without the intention of claiming the property as their own. Trespassing is a criminal offense. Call the Sheriff.
On the other hand, a squatter is claiming ownership. To get rid of a squatter, the owner must go through the civil court system (rather than the criminal system). File a lawsuit. The Sheriff can’t help.
The GAR form Seller’s Property Disclosure (SPD) provides for disclosure of insurance claims made during the Seller’s Ownership. If insurance claims have been made and they are not disclosed, the Seller may be accused of misrepresentation and fraud.
Why Disclose Insurance Claims?
There are several reasons.
First, disclosure by the seller avoids a claim by a buyer that the Seller misrepresented the property or did not disclose a material fact. If proved, it can cost the seller a lot.
Second, the SPD puts buyers on notice of issues that may affect their decision to buy. For example, if there was an insurance claim for a plumbing leak, the buyer would want to inspect the area to be certain the leak was properly corrected.
Third, the buyer’s home insurance premium can be much higher than expected if the seller has made numerous claims. Insurance companies do not want to insure a problem house. Depending on the number of claims, the buyer could have trouble getting insurance. Or if the insurance company decides to insure, it may decide to increase the premium to insure.
Fourth, the CLUE Report.
When a buyer tries to get insurance on the house, the insurer will pull a CLUE report.
CLUE stands for Comprehensive Loss Underwriting Exchange (CLUE). The report details a seven-year period of personal auto and property claims. Insurance companies use CLUE reports in the underwriting process and to determine premiums. The report includes the insured's personal information, policy number, type and date of loss, claim status, amount paid, and insured property information.
If the seller has not disclosed insurance claims, this is where the buyer will find out the truth. If the buyer gets the report before closing, it could kill the deal. If after closing, it could be grounds for a lawsuit. (Only owners and insurance agents can request the CLUE report.)
Remember the mantra: Disclose, disclose, disclose.
Sellers often are apprehensive about revealing problems that could potentially discourage buyers from making an offer. Remember the mantra: Disclose, disclose, disclose.
An inspector will likely find the issues anyway. The seller has then lost the buyer’s trust and lost the high ground in negotiating the repair. Or worse.
Buyer love letters are a tactic used by some buyers in an attempt to stand out to a seller, especially in hot markets with low inventory and bidding wars. Seemingly harmless, these letters actually raise fair housing concerns, and could open real estate professionals and their clients to fair housing violations.
To entice a seller to choose their offer, buyers sometimes write “love letters” to describe the many reasons why the seller should “pick them.” While this may seem harmless, these letters can actually pose fair housing risks because they often contain personal information and reveal characteristics of the buyer, such as race, religion, or familial status, which could then be used, knowingly or through unconscious bias, as an unlawful basis for a seller’s decision to accept or reject an offer.
Consider where a potential buyer writes to the seller that they can picture their children running down the stairs on Christmas morning for years to come in the house. This statement not only reveals the potential buyer’s familial status, but also their religion, both of which are protected characteristics under fair housing laws. Using protected characteristics as a basis to accept or reject an offer, as opposed to price and terms, would violate the Fair Housing Act.
If a letter is sent to the seller, it should never include pictures of the buyer or the buyer’s family. What can be done in a letter is write about the property itself or its characteristics. For example, “We love the house’s exterior and the garden and would take good care of it.” It is best, however, not to send a letter at all.
Best practices to protect yourselves and your clients from fair housing liability:
Source: National Association of Realtors
The GAR Purchase and Sale Agreement (PSA) does not provide a space for the broker to fill in the amount of the commission or the split of the commission with any cooperating broker. Instead, the amount of commission and any offer to split a commission is handled through the Buyer Brokerage Agreement (BBA) and the Seller Engagement Agreement (Listing Agreement). Listings in the FMLS or MLS in Georgia also provide the commission to be paid to cooperating brokers.
Commission Protection Distinction Between Exclusive and Non-Exclusive BBAs
The Exclusive and Non-Exclusive BBAs are very similar. The buyer’s broker in both agrees to look to the seller or seller’s broker for commission. However, there is a critical difference between the two agreements. With the GAR Non-Exclusive Buyer Brokerage Engagement Agreement, the broker can only recover a commission from the buyer if the buyer purchases property identified to the buyer by the broker during the term of the agreement—in other words, if the broker was the procuring cause. This is in contrast to the GAR Exclusive Buyer Brokerage Engagement Agreement, under which the buyer’s broker can claim a commission for sales made during the term of the agreement whether or not the property was identified to the buyer by the buyer’s broker.
The Buyer’s Commission Obligation in Purchasing Real Property is Offset by Payment from the Seller
This language can allay the fears of buyers concerned that they will be required to pay their agent the full amount of the commission. Of course, if the seller refuses to pay a buyer’s agent, that may be the case. Some buyer’s agents do not complete the space for commission paid by the buyer. Others sometimes write in the BBA that the seller will be responsible for commission to the buyer’s agent. This is risky. If the buyer defaults either by not closing on a valid purchase agreement or the buyer purchases through a different agent, there is really no recourse against the buyer.
This is the buyer obligation and offset language.
“The obligation of Buyer to pay Broker the Commission shall be offset by any commission paid to Broker by either seller’s broker or seller. Buyer’s Commission obligation shall exist even if the closing of the transaction occurs after the term of this Agreement has expired. Buyer shall additionally be responsible for paying the Commission if Buyer defaults under this Agreement or if Buyer enters into a Contract to Purchase during the Protected Period on certain properties as explained in the Protected Period section below…
Interest rates have risen, putting a squeeze on buyers. In a rising interest rate environment, alternative mortgage programs start looking very attractive. The 2-1 interest rate buydown and the 1-0 interest rate buydown are getting a lot of interest.
What Is An Interest Rate Buydown?
A temporary buy-down is a cash payment that effectively lowers the borrower’s interest rate for a limited period, allowing borrowers to reduce their monthly payments during the early years of the mortgage. The party providing the buy-down funds will normally make a lump-sum payment into an escrow account at closing. The borrower pays a monthly payment based on the reduced or “bought down” rate and the funds from the escrow account are used to make up the difference to the lender.
Typically, the payment of discount points reduces the interest rate for the first few years of the loan. For example, if the interest rate is 7% and a 2-1 buydown has been purchased, the buyer would pay interest at the rate of 5% for the first year, 6% for the second year and 7% for the remainder of the loan. A 1-0 buydown would start at 6%. A loan can also be bought down for the life of the loan. It is more expensive, of course, but the buydown fee can be justified if the buyers expect to be living in the property for a long time.
Although the GAR Purchase and Sale Agreement (PSA) includes commission protection language, it does not provide a space to fill in the amount of the commission or the split of the commission with any cooperating broker. The amount of the commission and any offer to split the commission is included instead in the Buyer Brokerage Agreement (BBA), the Seller Engagement Agreement (Listing) and through FMLS or MLS.
Buyer Brokerage Agreement. (BBA)
Both the Exclusive and the Non-Exclusive BBA include a blank to indicate the amount of commission to the paid to the selling broker. Typically, we see the commission amount completed. However, sometimes the commission space is left blank and a statement included that the seller pays the commission. In those cases, if the buyer defaults or if the buyer enters into a contract to purchase with another realtor during the term of the BBA or during a protected period, the buyer’s broker will not be able to recover from the buyer. (Remember that a black space always indicates zero.)
There is language that in the BBA that can relieve any buyer anxiety of being responsible for the full commission. The Commission section in the BBA provides that the buyer is responsible for the commission “minus any commission paid to Broker by either the seller’s broker or the seller.” This safety valve for the buyer will generally get a buyer’s agent over the hump of the buyer’s fear of including a commission in the BBA.
Negotiated contracts can get messy. There may be multiple documents, an offer and a counteroffer, or the original offer may have multiple strike throughs and insertions. Buyers, sellers and lenders may want a “clean” or conformed copy of the final terms for ease of knowing the final terms. The purpose of the conformed contract is to create a legible version of the original agreement.
The Terms of the Original Contract Should Not Change.
A conformed contract is just a clean version of a valid, fully executed contract and should not change any of the terms of the contract. The date on the conformed contract should not change. It should be the same date as on the original contract, even though it is signed at a later date.
If one party refuses to sign the conformed contract, the parties would still have a binding agreement so long as the original contract was signed by the parties and delivered back to the party making the last offer.
Assignment to a new party of the purchase agreement rights of a buyer is common in both residential and commercial real estate contracts. As previously noted in broker corner articles, the LLC form of ownership offers a number of advantages to owners of investment properties, including limiting the liability of the members.
The majority of assignments are to LLCs to hold specific property for the express purpose of limiting liability. The specific LLC has usually not been created at the time of the purchase, so assignment is the easiest way to transfer the contract to the new legal entity. This is true for both small investors and large investors in both residential and commercial purchase agreements.
Watch out. Assignments to newly formed LLCs can be for a legitimate purpose and perfectly legal. On the other hand, they can be a part of a money laundering scheme. It is very important for the closing attorney to review assignment and LLC documents closely to confirm the assignee’s status.
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