At its simplest, a settlement is where the seller passes, with one hand, a deed and keys to the buyer, and with the other, takes the buyer's money. The parties are generally trusting enough so that this doesn't happen simultaneously at the count of three! More frequently, the settlement is controlled by a title or settlement agent who acts as intermediary assuring that all obligations are met before the parties depart.
It is with surprising frequency that this exchange becomes complicated. The primary reason is that the buyer does arrive at settlement with cash or an equivalent. In most transactions, a lender is providing most of the purchase funds, and gone are the days when all lending institutions personally delivered the funds to the settlement table.
More than ever, funds are delivered by "wire." This process of transmitting the equivalent of cash from one institution to another is supposed to be instantaneous. I'm willing to bet, however, that the majority of you who read this article have attended at least one settlement that was delayed until receipt of the mortgage funds could be confirmed.
Regardless of the holdup, a closing should not be concluded until that basic exchange takes place: deed and keys for money. As basic as this principal is, it is frequently violated. In one case, a lending institution "confirmed" that its wire transfer was received by the settlement agent's bank. On that basis, the settlement agent concluded settlement and disbursed proceeds, commissions, fees and expenses. Later it was discovered that the lending institution wired the funds to the wrong account and the confirmation was only an indication that some entity had received those funds! Fortunately, the title agent's bank and the lending institution worked together to determine who erroneously received the funds, and retrieved them before it was too late. Imagine the consequences had the unintended recipient determined the presence of these unexpected funds and removed them!
Fortunately for realtors, you are rarely involved in the transfer of funds from the lending institution to the title agent and are therefore not called on the carpet should a funding error occur. It, therefore should be safe for you to presume that when the settlement agent disburses the seller's proceeds and your check, that it is safe to assume that all financial obligations of the parties have been satisfied.
There are occasions, however, when funding issues are known by all at the settlement table, yet settlement is allowed to proceed. It may be that the seller, with that one hand, passes a deed and keys to the buyer who extends with his other hand, an empty palm! This is exactly what occurs when the buyer's funds don't appear at settlement but everyone assumes that in a matter of minutes or hours everything will be rectified. Keys are tossed to the buyer, a deed delivered. This is exactly what happened last year on the Friday following Thanksgiving in a transaction involving one of my clients. Everyone, including the title agent, assumed that by the end of the business day the proceeds would be available, and so concluded settlement. The buyer moved in, but the proceeds never arrived. The following Monday, the lending institution advised that it had determined that there was a problem with the buyer's qualifications and that the buyer was not going to receive the proceeds! It took the seller three months to evict the buyer and thousands of dollars to repair the damage the buyer caused. Ultimately the seller filed suit against the title agent and the listing salesperson. Seller claimed that her agent should have stopped seller from delivering possession in the absence of purchase funds. Similar examples abound.
Occasionally you experience this problem in the reverse: the buyer hands over the purchase funds but does not receive keys and title. In some portions of the state, it is customary for sellers to deliver possession the day, or days, after settlement. It may be that the parties agreed that possession would take place after settlement, but this should be clearly indicated in the Agreement of Sale. Additionally, the buyer's agent should discourage buyers from taking possession after having paid the full purchase price. There are the obvious reasons such as assuring that the property is insured (a buyer may require an increased premium to insure a property not possessed by the buyer, even for a short period of time), maintenance, assuring that the property is in the same condition as promised, and other similar issues. If an arrangement is made where the seller retains possession after payment, it is imperative that the buyer's agent obtain a Post-Settlement Possession Addendum or an appropriate lease that covers all of the issues of potential risk for the buyer. Such a document should be prepared even if possession is to be given one day following settlement. This alone is sufficient reason to have payment and possession all transfer on the same day. No fewer than two of my clients have been before the Real Estate Commission for allowing their buyers to defer possession on the basis of an oral lease. As a real estate licensee subject to the Rules and Regulations there can be no agreement between the parties that you do not reduce to writing.
It's a golden rule: seller doesn't give possession and title until seller receives funds; buyer does not provide funds until seller gives possession and title. One, two, three, swap!
Copyright © Brett M. Woodburn, Esquire, CALDWELL & KEARNS, P.C., 2008
All Rights Reserved
Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.realcompliance.com.