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Legal Matters
Best of the Legal Hotline
by Debbi Conrad
As summer arrives, buyers look for lots where they can build their dream homes and
REALTORSŪ see more new construction on the market. This is part II of a series of new construction questions recently asked of the Legal Hotline. For additional new construction questions and answers, see the June 2002 edition of the Wisconsin
REALTORŪ.
Tax Proration
| Q. Re: An offer on a condominium unit. The condo is new and does not have an assessed value. In the contract, the selling agent wrote that the list price multiplied by the mill rate would be used as the tax proration. Since then, the listing broker has received the actual assessed value and the mill rate. It comes out to about a $237 difference. Is the listing broker obligated to use what is in the contract? |
| A. The offer to purchase contains the terms and conditions to which the parties agreed. The parties may amend the contract if they wish to use the actual assessment and mill rate. If not, taxes should be prorated based on the terms of the contract as written. Particularly in new construction transactions, care must be taken to ensure that the contract's language adequately addresses the parties' intent regarding tax prorations.
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| Q. Re: Contingency language for tax proration at the end of the year. The parties wish to set up an escrow account for holding funds until the actual taxes are determined. |
| A. The parties or their attorneys may prepare an escrow agreement to govern the disposition of the funds for taxes. The broker then may hold such funds for an after closing escrow in the broker's trust account. Wis. Admin. Code § RL 18.07(2) also allows brokers to retain escrows for the final proration of real estate taxes in the broker's real estate trust account if the closing statement shows that the broker is holding the funds.
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Escrows
| Q. The broker is holding $1,500 in escrow. The broker had been a buyer's broker in a transaction where $1,500 was escrowed for the installation of landscaping. The landscaping was never installed so the buyer went to small claims court and apparently received a judgment for $1,500. However, the broker was not named in the suit as a party or as the holder of the escrow funds. Is the broker permitted to pay out of escrow based on the judgment? |
| A. No. Since the broker was not named in the small claims court action, the broker is not within the jurisdiction of the court and its order. The parties may wish to try to have the small claims order amended to include the broker. This may not be possible without retrying the case. The broker might inquire whether the broker may pay the funds into the court and let the court disburse per the court's order.
The easiest resolution, however, is for the parties to sign a document authorizing the broker to disburse the money to the buyer.
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Construction Liens
| Q. Re: Sale of a lot. There is a well on the lot that is not paid for. The general contractor was ordered to buy the well. Another firm put in the well, but that company was not paid. Can a lien be filed against the general contractor or must it be filed against the owner? |
| A. A construction lien is a lien on all interests of the owner who personally, or through an agent, entered into a contract for the improvement of land. Within six months from the date the claimant last furnished labor or materials for the improvement, the claimant must file a lien claim with the clerk of court. Thirty days before filing the lien claim, the claimant must serve the owner, personally or by registered mail, with a notice of intent to file a lien claim. A copy of the notice is attached to the lien claim. The claimant can file legal action to foreclose the lien within two years after the claim is filed. If the owner received the notice of intent and the lien claim was filed no more than six months after the well was installed, then there would appear to be a construction lien against the property.
The judgment taken by the well drilling company against the general contractor is not for a construction lien-rather it is for a money judgment, which may be docketed against all real estate owned by him. If the general contractor does not own the lot, no lien would attach. The listing broker may wish to have the title checked to ensure there are no liens against the property she is listing.
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Commission
| Q. A new construction home with an unfinished basement was listed for $289,900 in the MLS at three percent. A subagent showed the property to prospective buyer and wrote an offer for $289,900. The offer was accepted. The buyer and the builder entered into a construction contract for completion of the basement for $36,000. The buyer found out that to get the best interest rate, she should include the $36,000 with the $289,900. The subagent then wrote a new offer to purchase for $325,900. The seller accepted, thinking the commission would be payable on the $289,900. The subagent now wants to be paid on the $325,900. On what amount should the commission be paid? |
| A. Upon placing a listing in the MLS, an MLS participant makes a unilateral offer of compensation to other MLS participants. Pursuant to MLS rules, compensation is shown as either a percentage of the gross selling price or a definite dollar amount. The MLS listing on this property indicated the cooperative commission would be three percent of the gross selling price. If the brokers cannot negotiate an acceptable settlement, the dispute should be submitted to local board arbitration for resolution.
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Warranty
| Q. A buyer wishes to purchase a new construction spec house. The builder does not want to supply any kind of written warranty. In Wisconsin, is there any requirement that the builder must supply a limited warranty for a spec home? If not, does the buyer have any remedy if there is a defect at a later date? |
| A. No warranty is required in Wisconsin. The parties may negotiate for the provision of a home warranty.
Wisconsin case law indicates that a building contractor may be liable for latent defects in connection with negligent construction, whether or not the parties had an express contract thereon,
Fisher v. Simon, 15 Wis.2d 207, 216, 112 N.W.2d 705(1961). In addition, Wis. Stat. § 706.10(7) provides for implied covenant from the builder/seller to the buyer that the house was built in a workmanlike manner and is suitable for the buyer's use and occupancy if the home is custom built for the buyer.
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Builder Breach
| Q. A buyer purchased a new construction property and is having problems with builder concerning some items that are not up to code, items that need to be replaced, etc. |
| A. Since the transaction has closed, the agent has no responsibility to assist the buyer with this situation, nor to give the buyer advice. Doing so will only expose the agent to potential liability. The buyer should be advised that the issue will need to be resolved by the parties themselves or with the assistance of legal counsel. The buyer may wish to get estimates of repairs and use an attorney. If the seller/builder is unwilling to honor the warranty, court action may be required.
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| Q. The agent wrote an offer on a home to be built for the buyer. The buyer had looked at a home that was in the process of being built. The buyer wanted the same home built on a different lot, so it was agreed that if there were any changes to items being used, the builder would notify the buyer. The builder showed the buyer carpet and vinyl samples and told buyer they were the same as in the other home. The buyer signed off on this flooring. The flooring was installed and the buyer is unhappy because it is not the same. The builder will not change it and said if the buyer does not want the house they would refund the buyer's earnest money and cancel the contract. What are the buyer's rights? |
A. If seller defaults, buyer may:
- sue for specific performance; or
- terminate the offer and request the return of the earnest money, sue for actual damages, or both.
In addition, the parties may seek any other remedies available in law or equity.
Specific performance is an equitable remedy where the court orders a party to perform as promised in the contract. However, if the legal remedy of monetary damages would prove adequate, specific performance would not be granted. This is not true, however, with contracts to sell, option, or lease real estate where specific performance generally should be ordered as a matter of course, barring extraordinary circumstances. Specific performance to sell land generally will be granted by the courts because each parcel of real estate is unique. No amount of monetary damages will enable the buyer to purchase an identical real estate parcel.
There must be a valid, binding contract in place before specific performance can be granted. The terms of the contract must be clearly established so that the court may determine whether all prerequisites to performance have been met. In order to be granted specific performance, an injured party also must show that he or she is able and willing to fulfill his or her side of the deal. The injured party must act promptly to be eligible for specific performance.
The caller should note that building and construction contracts generally are not specifically enforced. In most cases, there is an adequate remedy at law and the courts do not wish to become involved in supervising construction and building projects and jobs. In this case, however, the contract looks more like an offer to purchase than a building contract.
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What About Those Defects?
by Tracy
Rucka
Once the home inspection has been completed, the buyer must decide what to do next if defects have been reported. Although
REALTORSŪ cannot give legal advice, they need to be prepared to explain the buyer's options under the inspection contingency:
- Do nothing. If the buyer does not give a notice of defects by the deadline on line 301, then the home inspection contingency will be deemed satisfied. By doing nothing the buyer is indicating that he or she is satisfied with the property and will buy it "as is," in its present condition (absent any amendment negotiated between the parties that alters this result).
- Give a notice of defects. If the buyer insists that repairs must be made to defects before he or she will purchase the property, then the buyer should give a notice of defects. This is a serious step because it puts the power to decide the fate of the offer in the seller's hands. If the seller has the right to cure, the seller chooses whether to cure the listed defects or let the offer become null and void.
A notice of defects must be prepared on lines 10 through 34 of the WB-41 Notice Relating to Offer to Purchase. This notice should specify, "This is a notice of defects. The buyer objects to the following defects identified in the attached home inspection report: [list defects]." Note that line 303 of the offer warns, "CAUTION: A proposed amendment will not satisfy this notice requirement." A notice of defects drafted by a licensee must be on a WB-41-an amendment is not the same thing.
- Propose an amendment to change the terms of the offer to purchase. If the buyer wants to dictate how repairs are completed, who completes the repairs,the materials to be used, the standard of performance, the parameters for a follow-up inspection, or otherwise have control over the method of repair, an amendment must be used because the seller must agree to these requirements. An amendment for repairs may be proposed on lines 8 through 32 of the WB-40 Amendment to Offer to Purchase.
The amendment should state that the inspection contingency is deleted and that the parties instead have agreed to [perform the following repairs, give the following credit at closing, establish the following repair escrow]-give details! Deleting the inspection contingency from the offer helps ensure that if something goes wrong later on, neither party can resurrect the inspection contingency and its null and void language. The amendment must state all of the terms and conditions of the repairs because the repairs are now taking place outside of the inspection contingency.
The amendment is beneficial because it allows the buyer to ask for repairs in cases that may not really be defects and it gives the buyer the opportunity to specify details for the repairs like using a particular contractor, materials, technique, and standard of performance. However, the seller then has the option to accept or reject the buyer's proposed amendment or propose a different amendment.
If no amendment is accepted by the notice-of-defects deadline, the buyer will have accepted the property as is. For that reason the buyer should try to allow enough time so that a notice of defects can still be given if no agreement is reached for an amendment.
See Legal Update 99.10 for further discussion of the inspection contingency.
H REALTORŪ Practice Tip: When selecting the inspection contingency deadline on line 301 of the residential offer, remember that this is not only the deadline for the home inspection, review of the inspection report, and giving a notice of defects, it should also include time to negotiate amendments before the buyer must decide about a notice of defects. Parties may consider adding two or three extras days to allow for negotiation after the home inspection is completed.
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Environmental Brochure for Accurate Consumer Information
Environmental issues create a variety of concerns in real estate transactions. Although many of these concerns are legitimate, quite often consumers are overly concerned based upon incomplete or misleading information provided by media or other sources of information on issues such as mold, radon, asbestos, etc. The WRA is working on a brochure that will attempt to provide consumers with a succinct and balanced explanation of the risks posed by environmental hazards. The brochure is in the very early drafting stages but the WRA staff is interested in your feedback regarding the issues covered, the tone of the discussion, the length of the document, etc. A copy of the brochure can be found on the
Draft Forms page.
Please e-mail your comments to Rick Staff.
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Creative Financing or Fraud?
The State of Wisconsin, Department of Financial Institutions, has complaint forms and guidelines for filing complaints against mortgage brokers. A mortgage broker/banker complaint form is found at
www.wdfi.org/_resources/indexed/site/fi/mortbank/forms/mbcomplaint_form.pdf.
Guidelines for finance fraud complaints are found at www.wdfi.org/_resources/indexed/site/fi/mortbank/forms/mbguidelinesforfraudcomplaints.pdf.
Instructions for completing the complaint form are found at www.wdfi.org/_resources/indexed/site/fi/mortbank/forms/mbcomplaintintropage.pdf
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Milwaukee Partnership to Stop Predatory Lending Practices
The Milwaukee Fair Housing Counsel and its partners have begun an initiative to identify and eliminate predatory lending practices. The Strategies to Overcome Predatory Practice (STOPP) coalition will combat predatory lending by outreach, education, research, financial options and enforcement in Milwaukee County. Predatory lending involves practices such as charging borrowers excessive rates and fees, refinancings with high points and fees, and lender failure to disclose all financing costs. Borrowers and potential borrowers may call the coalition's consumer line at 414-278-9190 for advice and help.
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