ARTICLES OF INTEREST FOR REAL ESTATE AGENTS

1. HANDSHAKE REAL ESTATE CONTRACTS WERE OUTLAWED IN 1677
2. COURT OF APPEALS REAFFIRMS THE OLD ADAGE "BUYER BEWARE"
3. DEEDS SIGNED UNDER POWER OF ATTORNEY
4. DUTIES OF A NOTARY PUBLIC
5. WHEN BUYER BREACHES THE CONTRACT
6. LIABILITY FOR LOCATION OF LOT LINES
7. AGENT REBATES AND BONUS INCENTIVES

HANDSHAKE REAL ESTATE CONTRACTS WERE OUTLAWED IN 1677
By James E. Scarbrough, Association Attorney

Can real estate be purchased and sold based on a handshake? The answer is "no". North Carolina, along with all other states, has a statute which derives from a English law adopted in 1677 requiring that all contracts for the sale of real estate must be in writing. These statutes, known as "Statute of Frauds", are written to discourage mistake, misunderstanding, fraud, and other causes of disputes and lawsuits in the purchase and sale of real estate. Therefore, if an important element in a contract is missing (such as the property description or a signature), the contract is void because it violates the Statute of Frauds.

No special form is required in order to satisfy the Statute of Frauds so long as the document contains the essential elements necessary for a contract. These elements include the name of the buyer and seller, a description of the property, and the signature of the party to be charged with the contract.

Next to the signature on a contract, perhaps the most important element needed to create a valid contract is the "description" paragraph. How much legal description is needed in the contract? Generally, if the description of the real estate identifies a particular tract of land as distinguished from all other land, it is adequate and evidence can be admitted at trial to fit the description on the contract to the particular piece of land. Phrases such as "see deed" are insufficient unless the exact book and page number of the deed is stated in the contract. Suppose the contract describes the land as five acres on Highway 49 but the seller owns a 10 acre tract of land on Hwy 49. This contract would be invalid under the Statute of Frauds because the parties have not described "in writing" the 5 acres of land being sold. Our courts have held that a street address is actually ambiguous but will be sufficient so long as there is evidence beyond the street address which can be used to clear up the ambiguity and identify the land with particularity. A little extra time in describing the real estate to be sold may prevent a dispute and lawsuit based on the Statute of Frauds.

Is earnest money necessary for the validity of a real estate contract? The answer is "no". Earnest money has never been a legal requirement. Mutual promises are sufficient. In other words, a promise by the seller "to sell" and a promise by the buyer "to purchase" the real estate is enough to create the contract.

While it does not take much to create a binding contract to sell real estate, it does require the "basics" and, more importantly as a result of the old 1677 English law carried forward into state law, it requires that the agreement be reduced to writing.

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COURT OF APPEALS REAFFIRMS THE OLD ADAGE "BUYER BEWARE"
By: James E. Scarbrough, Association Attorney

In Hearne v. Statesville Lodge filed May 15, 200l, the North Carolina Court of Appeals reaffirmed the doctrine known as "Buyer Beware". In this case, purchasers brought suit for misrepresentation against the seller and real estate broker after purchasers learned that the septic system could not handle the purchaser's increased volume due to purchaser's commercial use of the property. The seller and the listing agent knew the purchaser intended to open a restaurant on the premises and allegedly told the purchaser that the septic system was adequate for that purpose. Relying on that information, the purchaser failed to make any independent investigation concerning the septic system and purchased the property. After closing, purchasers could not obtain a permit from the health department to open a restaurant because the septic system was inadequate.

In holding for the seller and the listing agent, the Court of Appeals held that where the seller and listing agent did nothing to trick the purchaser, did nothing reasonably calculated to induce purchaser to forego an investigation of the property, and where the purchaser had a full opportunity to inspect the property and determine its suitability, the purchaser could not reasonably rely upon a statement made by the seller and the listing agent. The Court of Appeals recited a number of North Carolina cases which have held that the purchaser's right to rely on representations made by the seller or the seller's agent is inseparably connected with the duty of the purchaser to use diligence with respect of representations made to him. In other words, the courts require purchasers to take reasonable steps to protect their own interest and will not allow purchasers to rely on general statements made by sellers or real estate agents. To do otherwise, according to the court, would merely encourage negligence and inattention on the part of purchasers.

The court in Hearn v. Statesville Lodge has enforced the classic "Buyer Beware" doctrine. Under this doctrine, purchasers are not allowed to rely upon "general" statements made by sellers. Without a doubt, this case will be cited often in the future in defense of sellers and real estate agents.

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DEEDS SIGNED UNDER POWER OF ATTORNEY
By: James E. Scarbrough, Association Attorney

It is often necessary and convenient for a deed to be signed by someone acting under a power of attorney for another person. Ordinarily this presents no problem. However, recently, and much to the dismay of many title attorneys, our state appellate courts have held that some deeds executed under a power of attorney are invalid to pass title.

In Whitford vs. Gaskill, the Supreme Court of North Carolina announced for the first time a new rule affecting the validity of gift deeds executed under power of attorney. The Court held that a person acting under a power of attorney has no authority to transfer title to real estate as a gift where the power of attorney document does not specifically authorize the making of gifts.

In other words, in common cases such as where a son or daughter, using his or her parent's power of attorney, conveys the parent's home as a gift (without monetary consideration), this deed may be invalid unless the power of attorney document contains language allowing gifts of property. Following the Whitford case, the appellate courts have continued to affirm the decision in Whitford and have held that it is also retroactive to old deeds. Therefore, where a gift deed is signed by a person acting under a power of attorney and there is no authority under the power of attorney to make gifts, the deed will be at least "voidable" and even perhaps "void". In law, there is an important distinction between voidable and void. In North Carolina, it now seems that such gift deeds by attorneys-in-fact will be void.

Since children have often used their parent's power of attorney to convey property by gift deed, there is now an important issue regarding title to such gift deeds. Often these gift deeds were used as part of an estate planning process where homes of older individuals with failing health were conveyed to the children under power of attorney. In the future, it will be important to examine each power of attorney document to insure that authority exists under the document to execute gift deeds.

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DUTIES OF A NOTARY PUBLIC
By: James E. Scarbrough, Association Attorney

Cashing a check at the grocery store requires production of a driver's license or photo identification. In contrast, many deeds are signed and notarized with absolutely no proof of identity. Unless the person signing the document is personally known to the notary, the notary should always require evidence of identity such as a driver's license.

Why is it important for notaries to follow a standard practice of requiring a driver's license or other photographic identification? If the notary handles hundreds of documents a year (such as the notary in a law office), after passage of five or ten years the notary would have no specific recollection of the person who signed the document. However, if the signer of the document later denies that he or she signed the document and the notary cannot specifically remember the document due to the passage of time, the notary can at least testify in court that it is the notary's standard procedure to require photographic identification. This evidence, together with evidence from a handwriting expert, should be enough to satisfy a court of law concerning the validity of a challenged signature.

The notary should follow the following minimum procedure: (1) the signer of the document should physically appear before the notary and acknowledge the signature (it is not necessary for the document to be signed in the notary's presence); (2) the signer must be personally known to the notary or have his identity proven on the basis of satisfactory evidence. ("Satisfactory evidence" should take the form of a federal or state government photographic identification such as a driver's license); and (3) the document should be signed in the presence of the notary or the signer should indicate to the notary that he or she voluntarily signed the document.

By following a standard procedure, the notary will insure against future challenges concerning the validity of the signature.

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WHEN BUYER BREACHES THE CONTRACT
By: James E. Scarbrough, Association Attorney

This article briefly discusses the options available to the seller when the buyer breaches the contract to purchase. In most cases, buyer forfeits the earnest money deposit. However, that is not the end of the story. The seller may also sue the buyer for additional money damages.

The seller's measure of damages in an action for breach of contract is no different from any other contract action. The seller is entitled to the "benefit of the bargain" and "consequential damages". The benefit of the bargain is the difference between the contract price and the fair market value of the land at the time of the breach. In other words, if the Seller later sells the property for less, he may want to sue the original buyer and argue that the original buyer is liable for the difference between the first contract and the lesser amount when the property was sold to the next purchaser.

Since the "benefit of the bargain" measure does not always help the seller, the seller may also recover consequential damages. Consequential damages include things such as additional mortgage payments required to be paid by seller until the house is resold, expenses of reselling the house, and house and yard maintenance. See Taefi v. Stevens, 53 NC App. 579 (1981). Additional damages could include the insurance and taxes which seller must pay until the house is resold. If the house does not resell quickly, the seller's damages against the original buyer could add up. Therefore, if the buyer believes that he can walk away from the contract simply by forfeiting deposit money, this is not true under North Carolina law.

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LIABILITY FOR LOCATION OF LOT LINES
By: James E. Scarbrough, Association Attorney

Issue: When are you liable for a mistake in the location of lot lines?

Facts: Seller -Contractor builds a new house on a heavily wooded lot. Part of the lawn is steep and difficult to walk. Seller grades and sews grass. The graded areas are located to the front of the house and appear to go with the house. Seller does not show the lot lines to listing agent and agent assumes all the new grass is on Seller's lot.

The listing agent shows Buyer the house and lot and points out the nice lawn in the front which is now covered with new grass. Buyer does not order a boundary survey, purchases the house, and moves in. Two months later a neighbor tells Buyer that about one half of Buyer's front lawn is actually on the neighbor's lot. The neighbor shows Buyer the front corner stake hidden in the grass. Buyer sues Seller and listing agent for misrepresentation of the lot lines. Who wins?

Answer: Buyer wins. This is an actual case known as Vickery v. Olin Hill Construction. The court did not require that Buyer order a boundary survey. Instead, the court stated Buyer could rely on the representations of the real estate agent concerning the location of the lot. According to this North Carolina Court of Appeals decision, the Seller and listing agent are in a better position to know the location of lot lines and, therefore, Buyer has a right to rely on their representations.

Advice: When in doubt, recommend that the Buyer obtain a boundary survey. Also, be sure your real estate agent knows the location of the lot lines, because you will be liable for your agent's mistake.

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AGENT REBATES AND BONUS INCENTIVES
By: James E. Scarbrough, Association Attorney

Can your real estate broker rebate part of the brokerage commission to the buyer in a transaction? The answer is "yes". TheReal Estate Commission takes the position that individuals can buy and sell real estate for their own account without a real estate license and, therefore, rebating a portion of the brokerage commission to the buyer or seller is not a violation. However, if the rebate is paid to a party in the transaction other than the party represented by the agent, then full disclosure must be made to the agent's client. For example, if the listing agent is rebating a portion of the commission to the buyer, this can only be done with the permission of the seller.

A related question is whether the contractor or seller can pay a bonus directly to the sales agent. The answer is "yes" if the bonus is paid to a broker and not directly to an agent having only a salesperson license. A salesperson accepting compensation from any person other than his broker-in-charge is a violation.

Another related question is whether "non-cash" compensation can be used as a bonus or rebate. The answer is "yes". It does not matter whether the bonus or compensation takes the form of cash or non-cash items such as tickets, a toaster, or any other item. If it has value, it comes under the same rules as cash.

Lastly, if there is a rebate or bonus does it have to show on the closing statement? The answer is "yes". I am not sure how non-cash items should be shown on a closing statement, but perhaps the closing attorney can simply put bonus items like tickets and toasters on the closing statement without showing any monetary value.

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