FAQ : Brian, the seller wants to change or strike the general warranty, state of title, and/or mechanic’s lien clauses from the contract, is this ok for my buyer?
Answer : No, it is not ok. Explanation below (and come to the October 13 Roundtable for an even better explanation from First American regarding title insurance!).
The current market has generated more than the usual normal number of institutional sellers such as REOs, institutional investors, relocation companies, foreclosed property re-sales, and simply investor-buyers-turned-sellers. And these companies seem loathe to take any risk, real or imagined, and since many are out-of-state they are not familiar with Virginia law, custom, or practice. As a result I am being asked quite frequently whether it is ok, from a buyer’s standpoint, to permit such a seller to strike or change the paragraph or paragraphs that address title warranty, state of title, and mechanic’s liens. These sellers want to strike that language on the theory that they were not owner occupants and do not want to make any warranties or promises regarding the property; rather, they want to minimize or eliminate any potential liability whatsoever (at least what they perceive as liability).
The REIN contract, at paragraph 8, provides (in part) that:
Seller shall convey marketable and insurable title to the property by general warranty deed, unless otherwise specified below, subject to any easements covenants and restrictions of record, which do not adversely affect the use of the property for residential purposes.
The REIN contract also provides, in paragraph 7, again in relevant part, that:
At settlement, seller shall execute and deliver (i) the deed, (ii) a mechanic’s lien affidavit acceptable to buyer’s title insurance company, and (iii) such certificates and agreements as may be required by state and federal authorities for tax and residency purposes.
First, as a buyer’s agent you simply cannot permit a seller to strike the clear, marketable and insurable provisions of the contract. If you do then your buyer client has no remedy if the seller cannot deliver clear title – the buyer has to close with bad title – and a title insurance company will not insure against known defects so that does not help. Since clear title cannot be delivered and title insurance cannot obtained the lender will not make the loan, thus the buyer can argue that the financing contingency is not satisfied and the buyer need not close, but I worry that in response the seller could point to the language in the contract that says handwritten or notated provisions control boilerplate printed ones. I think the buyer wins, but having to go to court to find out isn’t exactly what Bobby had in mind.
I am not so much concerned about such a seller striking the general warranty deed clause, or more likely, changing it to special warranty (even to quitclaim). While it is certainly better to have a seller convey by general warranty, that disadvantage can be mitigated by having the buyer purchase an enhanced owner’s title insurance policy. However, you must retain the language regarding clear, marketable and insurable title otherwise your buyer may be forced to accept an owner’s title insurance policy with exceptions, that is, the title insurance company disavows any responsibility for insuring against a particular, known, problem. In the trade we say that they “take exception” to the problem (read: buyer you are out of luck).
Lastly, the provision regarding mechanic’s liens is extremely important. Lenders require affirmative coverage against mechanic’s liens. Since they are at risk for a problem they cannot discover or eliminate, title insurance companies, including First American (the company we use), insist upon receiving an affidavit from the seller regarding the absence of work by a contractor or supplier for which a mechanic’s lien could be filed or claimed. Title insurance companies will not issue a policy without it, and since the lender requires it, the net effect is that you simply cannot close the transaction. This problem was/is acute enough that REIN included the requirement for it in the contract, and the Virginia General Assembly made it Virginia law. I just concluded a recent transaction where the seller struck this language (and the buyer agreed) and the title insurance company would not insure without the affidavit. Despite me pointing out the Virginia law that obligated the seller to provide the affidavit, they would not. After fighting the battle for a couple of weeks we finally reached a reasonable compromise and the deal closed, but it was not a situation that lent itself to agent/broker/lawyer sanity or client satisfaction. So please do not allow a seller to strike that requirement, and if you are trying to write a deal and the seller wants to strike it, please contact me and I will help you (and the seller) get past that dispute.
Note that the VAR contract has the same language in paragraph 19 regarding the mechanic’s lien affidavit, and similar obligations with respect to title at paragraph 13. So there is no practical difference between those of you writing on the REIN contract and those of you writing on the WAAR VAR contract.
As always, I think you for your business and please do not hesitate to call, email or visit me if you have any questions or problems I can help you with.
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