Category Archives: Legal Issues

Avoiding anti-trust discussions

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The new “Instant Offer” feature touted on some online listing sites has caused many real estate agents to reconsider their use of these sites. Some Realtors® have suggested their organizations take a position on these features.

“We’ve seen many Realtors® speak out on social media about this issue and many have called for boycotts,” said Hank Lerner, PAR’s director of law and policy. “While individual brokers and agents can certainly make independent business decisions about distributing their own listing content, we want to caution members against starting or promoting group boycotts of Zillow. It’s unlawful for associations to encourage members to withhold listings or business from any company, or to adopt rules that would prevent them from doing so.”

The National Association of Realtors® encourages Realtors® to show their value to homebuyers and sellers.

Realtors® know and understand their local markets far better than a website can. Realtors® work with home sellers to prepare their home for the sale and market their home to a large audience. As a real estate professional, Realtors® negotiate the best deal for their clients.

“In the meantime, it’s best to avoid conversations that could be a violation of anti-trust laws,” Lerner added.

Selling a business

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Time and again, we receive calls on the legal hotline from members asking if they are “legally” allowed to sell a business without real estate.

Some of the related questions include:  Do I need a special license to sell the business? Can the seller pay a fee to me, a licensed salesperson, directly, or does the fee have to run through my broker? Do the Real Estate Licensing and Registration Act and the rules and regulations of the State Real Estate Commission provide guidance, and is my real estate license at risk for any problems that arise from the sale of the business part of the transaction?

Yes, your real estate license is at risk, even if the problem is with the business part of the transaction. No, RELRA and the rules and regulations do not provide guidance relative to the sale of a business.  It depends, maybe the fee can bypass a broker and be paid to the salesperson directly.

The idea of “selling a business” can have many iterations.  At its simplest, “selling a business” is matchmaking: introducing an interested buyer to the seller and letting their respective attorneys do the rest. Period. The other end of the spectrum involves valuing the business and real estate separately, allocating purchase price between real estate and assets, drafting agreements of sale, mortgage and loan documents, overseeing due diligence, etc.

Pennsylvania does not have any licensing requirements for individuals who market only businesses for sale. Business brokers may be generalists who have experience marketing, or they may be individuals with a specific industry knowledge. Usually, the business broker has contacts from which to draw as they function in the role of matchmaker, then stepping aside to allow the parties to negotiate the terms of the transaction.

When the sale of the business is tied to the sale of the real estate, the Real Estate Commission might be able to discipline you for your conduct in the transaction. When the real estate and business are sold together, the commission can look at your conduct in the whole transaction, even though you may contend that your activity as a business broker is distinct from your role as a licensee.  Depending on how deeply you involve yourself in the sale of the business, you could quickly find yourself beyond your area of expertise.  Remember, the commission can discipline you for failing to advise your client to seek expert advice in matters beyond your ken.

Tom Caldwell, my predecessor as general counsel to PAR, was fond of saying, “A smart man knows what he doesn’t know.”  When it comes to selling a business, with or without real estate, you should know that there is very little, if anything, in your training as a real estate licensee that prepares you for this task.

I feel there is but one way for a licensee to be involved in the sale of a business and that is as a matchmaker. List the property, market the business, but when a buyer comes along, deliver the buyer and seller to separate counsel. Provide information, be a part of the process, but do not have buyers and sellers sign documents you have prepared that have not been thoroughly vetted by an attorney. In most cases, perhaps in all cases, counsel should be drafting the documents used in the transaction.

Licensees who are asked to sell a business should consult with and obtain their broker’s approval. They should clearly explain to sellers their limited role in merely marketing the business, and locating potential buyers, and that it will be the role of the seller, with the benefit of counsel, to specifically structure the entire transaction. Keep in mind that certain sales do require specific licenses, like selling cars, and in other transactions, licenses must be separately acquired, like liquor licenses. Keep yourself out of trouble and “know what you don’t know.”  When in doubt, contact counsel.

The Fair Housing Act and non-citizens: What you need to know

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In light of contemporary American discourse and current events, a question regarding the scope of the Fair Housing Act was posed: Does the FHA prohibit discrimination on the basis of citizenship?

Put another way, can housing providers refuse to rent to a person because the prospective tenant is an illegal alien? As always, the starting point for this question will be the FHA itself. Under the FHA, it is unlawful to refuse to rent, sell or discriminate in the terms of a rental on the basis of “race, color, religion, sex, familial status or national origin.” The text of the FHA does not directly answer the question as it does not directly state alienage or citizenship. The closest categories relating to citizenship are the bases of race, color and national origin.

The next question is whether discrimination on the basis of citizenship constitutes discrimination on the basis of race, color or national origin. Courts that have addressed this issue have consistently held that it is not.  A U.S. Supreme Court decision, Espinoza v. Farah Mfg. Co., stated that the term “national origin” refers to the country where a person was born or the country from which his or her ancestors came. “National origin” does not refer to the dichotomy between citizen and non-citizen.  In employment contexts, the Supreme Court used a helpful example: “It would be unlawful for an employer to discriminate against aliens because of race, color, religion, sex or national origin—for example, by hiring aliens of Anglo-Saxon background but refusing to hire those of Mexican or Spanish ancestry … but nothing in the Act makes it illegal to discriminate on the basis of citizenship or alienage.”

Because the Supreme Court was construing the same phrase, “national origin,” that appears in other parts of the civil rights act, lower courts have applied that same reasoning to the question of housing.  Therefore, it may be permissible to discriminate on the basis of citizenship, and therefore against, illegal immigrants, under the FHA.

A review of the FHA, however, does not end our inquiry into this subject. As I am sure readers are aware, the Pennsylvania Human Relations Act contains many of the same protections as the FHA and in some areas, additional protection.  The relevant sections of the regulations promulgated under the Pennsylvania Human Relations Act use the terms “race, color, familial status, age, religious creed, ancestry, sex, national origin, handicap or disability of any person” to define a protected class from discrimination. I have yet to find binding Pennsylvania case law directly speaking of citizenship. Thus, for the time being, this question is left unanswered by the Pennsylvania Human Relations Act.

At the end of all of this, we are left with some mostly complete answers. Under federal law, it is permissible to discriminate on the basis of citizenship, but under state law, it may or may not be. (We venture that Pennsylvania would likely follow federal law on this point.)  In reviewing all of this, it is important to remember one last critical point. Whether you should factor in citizenship requirements is a very different question than whether you should make this determination in housing decisions.

FIRPTA: What is it and why should you care?

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Did you know homebuyers are responsible for ensuring that the IRS collects at least 15 percent of the sale price of real estate when the seller is not a U.S. tax resident?

The Foreign Investment in Real Property Tax Act of 1980 is found in the Internal Revenue Code and authorizes the U.S. to tax foreign individuals who are selling U.S. real estate. Specifically, FIRPTA provides “Except as otherwise provided in this section, in the case of any disposition of a U. S. real property interest … by a foreign person, the transferee shall be required to deduct and withhold a tax equal to 15 percent of the amount realized in the disposition.” 26 U.S.C. §1445(a).

Being a U.S. tax resident is separate and distinct from one’s immigration status. U.S. citizens are considered to be U.S. tax residents as well. Similarly, permanent resident aliens (i.e., green card holders) are also considered to be U.S. tax citizens. The third way an individual can be considered a U.S. tax citizen is if they satisfy the “substantial presence” test. Satisfying this test is somewhat complex, to summarize, the individual must have been in the U.S. for 31 days during the current year, and 183 days during a three-year period including the current year and two immediate years prior.

How and when does FIRPTA apply?

The general rule is FIRPTA applies in all transactions in which the seller is a foreign person (meaning not a U.S. tax resident). There are several exemptions to the general rule, some of which apply to individuals and others that apply to business entities. Looking at the exemptions benefitting individuals, if the seller provides a non-foreign affidavit, which is a statement under oath in which the seller provides the taxpayer identification number and attests that the seller is not a foreign person, then there is no obligation for the buyer to withhold money. The obligation to withhold money is absolved if the buyer receives a qualifying statement from the secretary of the U.S. Department of Treasury that satisfies certain criteria. The buyer’s obligation to withhold 15 percent from the amount realized does not apply if the buyer is purchasing the property as a primary residence and has paid less than $300,000.00.

Understand that FIRPTA is an issue for both buyers’ and sellers’ agents. As noted above, the buyer (or transferee) is charged with the responsibility of withholding 15 percent of the amount realized in the sale. However, if the buyer failed to withhold the requisite percentage because the sellers’ agent (including attorneys), the buyers’ agent (including attorneys) or the settlement company (including attorneys) knowingly failed to notify the buyer that the seller was a foreign investor, then the obligation to withhold the 15 percent of the amount realized in the sale may fall to the sellers’ agent, buyers’ agent and/or title agent to withhold the required amount.

Fortunately, for the various agents and attorneys involved, liability is limited to the amount of compensation that the agent earned in the transaction. For listing brokers, remember that the amount of compensation you earn is established by the listing contract (see Paragraph 5 of the PAR Listing Contract). The amount of compensation is the gross fee identified in your listing contract, i.e., listing percentages before a cooperating fee is paid plus any flat fee charged by the broker. Having to pay this fee would not absolve the listing broker of paying the cooperating fee. The buyers’ broker’s liability when there is a failure to withhold a FIRPTA percentage in the amount of the cooperating fee received, any flat fee paid by the buyer, and any other source of income derived as part of the transaction. Title agents may be responsible for the gross fee collected after the title insurance company is paid its premium.

It is important to understand how and when this liability can be imposed on the agents and attorneys involved in the transaction. If the seller furnishes an affidavit of non-foreign status and any of the agents involved in the transaction knows that the affidavit is false, and that agent or agents fail to notify the buyer that the information is false, then agent liability is triggered. Before breathing a sigh of relief, examine the obligations under FIRPTA:

  1. Buyer must deduct and withhold 15 percent of the amount realized on the sale when the seller is a foreign person.
  2. Withholding is not required if the buyer is purchasing the property as the Buyer’s primary residence and the purchase price is less than $300,000.
  3. Withholding is not required if the seller provides a non-foreign affidavit.

FIRPTA does not require a buyer to obtain a certification from a seller that the seller is not a foreign person. However, if a buyer relies on other means to determine that the seller was not a foreign person but the seller was, in fact, a foreign person, then the buyer is still subject to liability for failing to withhold the required 15 percent of the amount realized by the sale of the property. FIRPTA can be a very big deal for buyers. Are you doing what you can to protect them?

 

The buyer’s remedy when the seller cannot convey good title

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What can a buyer do when the seller cannot convey good and marketable title as promised in the Agreement of Sale?

Paragraph 17(G) of the Agreement of Sale provides that if the seller is unable to give good and marketable title to the property, the buyer will be entitled to elect from the following remedies: 1) take such title as the seller can provide or 2) seek reimbursement of the deposit and “any costs incurred by buyer for any inspections or certifications obtained according to the terms of this agreement.”

While the buyer is given two remedies, the buyer also loses another remedy that, but for this language, would be available under Pennsylvania law. Generally, in Pennsylvania, a party who is aggrieved by another’s breach of a contract is entitled to sue for the actual damages sustained. In the case of a buyer who has lost the ability to purchase the property because of a title issue, the losses will usually exceed the deposit paid by the buyer. The return of the deposit only makes the buyer whole. The buyer gains nothing more by being reimbursed several out-of-pocket expenses.

The damages a buyer might actually suffer can be far greater. Imagine the buyer who seeks to purchase undeveloped land for the construction of a hotel, a mall or even a home that is likely to benefit from appreciation that outperforms the general market. These losses are “consequential damages” and they represent the profits that may have been seen down the road, but which are lost due to the title problem.

Why do we, in our Agreement of Sale, take away the common law remedy to seek damages that the law would otherwise provide? Generally, title issues are not malicious or intended breaches by sellers. Title problems are insidious and usually uncovered as the result of a title search. In these cases we seek not to punish the seller or even impose the hardship for covering buyer’s losses.

This limitation of the remedies available to a buyer when a seller cannot provide a title are time-worn; as currently written, they have appeared in Agreements of Sale for well over a decade. We seem to live with this remedy quite easily. With respect to commercial agreements, drafted by lawyers, other provisions may be negotiated as may fit the case.

Further, it is always possible to discover a title problem within days of execution of the Agreement of Sale, if not before.  While it is not the practice to do a title search before signing an agreement, it should be the practice to do one as soon as reasonably practicable after the execution of the agreement. In this way a buyer can cut bait and run rather than wait weeks or months before finding out that his aspirations to acquire the property have been dashed.

So, we understand why our agreement includes a limitation of the damages available to a buyer when a seller defaults with respect to the conveyance of title. But that is not the end of the story.  In some cases, the buyer is freed from the bounds of this limited remedy and may pursue the larger consequential damages that he or she may have suffered. Why and when does this occur?

As noted, Paragraph 17(G) provides an election of remedies. In many cases, the first option, take what title the seller can provide, may not be available. What if the title flaw is that the seller doesn’t own the property, or what if there is recorded right-of-first-refusal that is exercised by the owner of that right? In these situations, there is no title for the buyer to acquire, so it would seem that the buyer is left to the second available option, take back the deposit and get reimbursed for inspections and certifications.

Our courts have ruled that when a contract provides for an election of remedies, and one of the options is not available, then the entire clause fails and the buyer may seek what damages the law would otherwise allow.  More plainly put, if the seller can’t give title, the buyer has a right to sue for whatever losses he or she can prove and is not merely stuck with a reimbursement of the deposit and those few costs.

In light of the issues discussed in this article, what is the agent’s best practice? The average agent should encourage her client to get a title search soon after entering into the agreement of sale. By conducting the title search early in the process a buyer can avoid expenses incurred in the anticipation of purchase such as architect or surveyor fees. The agent should also recommend that the client seek the advice of an attorney once a title defect is discovered so that the buyer is fully informed as to what remedies are available to them.

This article was co-authored by James Goldsmith, Esquire. 

The enforceability of liquidated damages

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Is the liquidated damages clause in the Agreement of Sale enforceable?

To be clear, the liquidated damage clause at issue in this article is the liquidated damage clause found in paragraph 26(G) of the Agreement of Sale.  The answer is, as is so commonly the case in questions of the law, it depends.

Pennsylvania courts have decided that when a liquidated damage clause is tantamount to a penalty, the clause is unenforceable.  In order to be enforced, the liquidated damage must be a reasonable forecast of the potential harm to the non-breaching party.  The benefit of having a liquidated damages clause is that it should limit litigation over damages and allows the parties a degree of certainty when entering into the contract. While courts strive to enforce the intent of the parties to these contracts for that very reason, courts will not enforce a clause that amounts to a penalty and is essentially unfair to one side.

Courts that have reviewed liquidated damages clauses have applied a five-part test to determine if the liquidated damages are in fact a penalty and therefore, unenforceable.

The courts look at:

  1. the language of the contract
  2. the intentions of the parties
  3. the subject of the contract and its surroundings
  4. the ease or difficulty in measuring the amount of damages
  5. the sum stipulated.

It is unlikely that your average residential buyer or seller considers all of these elements when entering into the Agreement of Sale.  Fortunately, courts that have ruled on the enforceability of the liquidated damages, in the real estate setting, have primarily focused on the ratio between the liquidated damage and the amount of the deposit being held as the liquidated damage.  Specifically, in real estate transactions, courts have held that where the liquidated damage is equal to between 9 to 11 percent of the purchase price the liquidated damage is a reasonable forecast of the potential harm and is enforceable. On the other hand, a court held that a liquidated damage that amounted to 60 percent of the purchase price was not reasonable and was found to amount to a penalty and was unenforceable.

The court has stated that real estate transactions are within the class of cases where the amount of damages for a breach in performance is difficult to determine. It is for that very reason, that Agreements of Sale for real estate include liquidated damages clauses to cover a buyer’s breach.  In the current real estate market, the amount of the deposit paid by buyer may be insufficient to cover the actual damages incurred. Frequently deposits of $500.00 to $2,500.00 are tendered as deposit money, regardless of the purchase price of the property.

Although Pennsylvania Courts have not considered the question of an insufficient liquidated damage, courts in other states have found that in the absence of fraud, duress or unconscionability, liquidated damages provisions are not subject to challenge based on the allegation that the liquidated damage is inadequate to compensate for the damages actually incurred.  The lesson here is that if you anticipate substantial damages, then you might negotiate for a deposit that ranges between 9 to 11 percent of the purchase price.

In the alternative, and rather than accept an insufficient deposit that is the limit of seller’s recovery, remove the check-mark that makes the deposit a liquidated damage.  In that way, a seller may endeavor to recover actual loses in the event of the buyer’s default.

This article was co-authored by James Goldsmith, Esquire.