These Agreements obligate an owner to pay a real estate commission, contain covenants running with the land, and potentially create a lien against the property that could be adverse to a buyer. Don’t be caught off guard if one of these appears in your title search.
Melissa Jay Murphy 0:05
Welcome to The Fund's Title Now Pop-up webinar. I'm Melissa Murphy with The Fund and we do these webinars from time to time, on relevant or developing topics. They're free. So we don't offer CLE because we want them to be as spontaneous and conversational as much as possible rather than instructional. That's why we discourage PowerPoints because we really want there to be a conversation between the speakers and we also have a an ulterior motive, which is to push the audio out to our podcast, which is also called Title Now. You can get the podcast wherever you subscribe to other podcasts. So sign up now. We are going to take questions at the end of our prepared remarks. So if you have a question about any of the information that we talked about, just put something in the chat, and we have John Benson, who is very overqualified to monitor the chat, but he offered to do it, so I took him up on it. And then at the end of our prepared remarks, we'll see what questions you might have. Joining me today is Brian Stringer. Brian is one of our Fund underwriting counsels. We are here to talk about memorandums of agreement that are popping up in the public records around the state, in fact, around the country. And these agreements create what many people feel are surprising obligations on the part of an owner of property who might become a seller of that property in the future. And some of these obligations may bleed over to the buyer also. So Brian, tell us what these agreements are all about.
Brian Stringer 2:06
Well, these agreements basically what they provide us is in exchange for an up front payment of money, which can be anywhere from a few $100 to several $1,000. The owner obligates themselves to list their home with a specific broker if they decide to sell because on provide that the owner role of commission typically 6% upon the sale.
Melissa Jay Murphy 2:23
Well, how long did these obligations typically run?
Brian Stringer 2:28
Well, that's the thing that makes things a bit unique. The typical listing agreement may last for a few months or up to a year, but we've seen these agreements with terms for as long as 40 years
Melissa Jay Murphy 2:37
40 years. Does it apply only if the owner wants to list a property with a broker? What I'm getting at is the owner allowed to sell their home on their own a FSBO?
Brian Stringer 2:53
Well, that's a great question and unlike a typical agreement the owner can't sell their home on their own. These agreements, again, it's gonna depend on the individual agreements, because there's a few that are out there, but the commission is likely due even if they sell without the use of any broker at all. Even if the commission is not due, for some reason, many of the agreements that we've seen have a fee that's triggered by any transfer of the property, even a gift or a conveyance with no consideration.
Melissa Jay Murphy 3:17
Well, I would, I would hope that it only covers a voluntary sale or conveyance, but do the typical agreements that you've seen cover any type of transfer of ownership? I mean, what if the owner dies?
Brian Stringer 3:34
Well, yes or no. That's an interesting wrinkle with these agreements as well. If the owner dies and title transfers to an heir beneficiary there's no fee due, but only if the heir beneficiary agrees to assume the obligations under the current agreement.
Melissa Jay Murphy 3:49
So these agreements that you've seen would cover a transfer resulting from death if the heirs don't agree to assume the obligations that would obligate them upon the future sale of a property.
Brian Stringer 4:03
That's correct.
Melissa Jay Murphy 4:05
What about other types of involuntary conveyances like a foreclosure or something of that nature? Are those transfers also covered?
Brian Stringer 4:17
So they are and so some of those are specifically outlined in the agreements that say a transfer and foreclosure voluntary/involuntary transfer are often listed as what they call the triggering events which requires a payment, not typically the full 6%, but some other amount is calculated based upon the value of the property.
Melissa Jay Murphy 4:35
So it sounds as if the exact terms of these agreements are dependent upon the wording of the agreement, which of course is true of any contract. And these vary depending upon who the broker is and what iteration of their contract they happen to be using at that time. But what are other types of provisions that you are commonly seeing in these agreements? Is there any way for the owner to opt out of this obligation?
Brian Stringer 5:11
There is. Once they've agreed to list with the broker, they're sending these agreements most of the agreements have come from an early termination or cancellation provision, and they usually provide that the owner can opt out by paying an early termination fee, which is typically equal to a certain percent of the fair market value of the property as determined by the broker or the other party to the agreement. So that's the difference is that the broker is the one that's going to calculate the early termination fee at the time the other seats determine.
Melissa Jay Murphy 5:38
Is there any provision for the owner to challenge or arbitrate or negotiate that value that the broker determines? Have you seen anything like that in these agreements?
Brian Stringer 5:51
I have in respect to arbitration. I have seen that there is a requirement to arbitrate disputes or new agreements but specifically with respect to the calculation, that early termination fee and fair market value, which you would typically see in a contract where an each party would say, "I think this is a fair market value," and other people would say "I don't think that's the fair market value" and a third arbitrator would come in and say "This is a fair market value." The ones that I've seen just provide that the broker is going to determine the fair market value.
Melissa Jay Murphy 6:17
Well, I can see where that would be a possible point of contention. But let's move away from the provisions of the agreement and talk about what you've seen happen out in the real world. What have you seen happen if the home is sold, and the broker that was a party to these agreements is not "Hey, what's happening?"
Brian Stringer 6:44
We've seen that and the odd thing about these is they don't make a demand for payment from the party. We enter into the brokerage agreement. They're making demands for payment from the buyer, subsequent owner, not the seller of the product.
Melissa Jay Murphy 6:57
On the buyer? how can they leverage the buyer to pay this fee when they weren't even a party to the agreement to start with?
Brian Stringer 7:08
As we've seen from these agreements, the brokers have hired very competent and clever attorneys and the obligations that they create in these agreements, they purport to be covenant with the land. So that's how they get the buyer or any other successor an interest obligated is that these obligations attached to the property and they're not independent contractors.
Melissa Jay Murphy 7:27
So the obligation to list with this particular broker is an ongoing obligation for every future owner of the property?
Brian Stringer 7:41
It appears the plain reading of these agreements is that they are going to be obligating every future owner of the home for up to four decades versus they could expire on their terms for the passage of time, but in the intervening term, they obligate everyone who owns that property.
Melissa Jay Murphy 7:55
Well, I have read some of these agreements and the ones that I have read, contain language to the effect that the broker has a lien against the property, if title transfers and they aren't paid their commission, so it's a springing lane, or lane that will come into existence. And so is that part of the demand that's made on the buyer? You know, something to the effect that foreclosure of that lane will begin if they don't pay this fee?
Brian Stringer 8:32
That's exactly what we've seen. So we've seen demands for payment on a subsequent owner, and they're not used to demand for payment. They've been accompanied oftentimes by a draft foreclosure complaint. This way the owner knows that they don't fulfill the demand that the broker is ready, willing and able to go to court or close their lien interest.
Melissa Jay Murphy 8:50
Well, this seems to be the real heart of the problem from The Fund's perspective. I mean, certainly we want to make Members aware of these agreements, they are out there in the practice. But what we are focused on and most concerned about is delivering clear title to our proposed insured. So how are we dealing with a potential assertion of this lien when one of these agreements show up in a title chain? And, and by the way, what exactly shows up in the public records?
Brian Stringer 9:31
Good point, what we're seeing in the public record typically, we're not seeing, at least I have not seen that full agreement. What we're seeing is either a memorandum of agreement or a memorandum of interest, which is signed witnessed notarized in part by the owner. So it can be recorded. And it's very similar, to what you see with a memorandum of lease. It's just putting the public on notice that this agreement exists and here are the basic terms. You can contact this party in order to proceed.
Melissa Jay Murphy 9:58
So are we addressing these things in our commitments?
Brian Stringer 10:05
We are and just started with creating a new Schedule B-1 requirement. It's going to be included in the commitments on the properties where we find these memorandum of agreement because the we've drafted requires that the period be terminated in any lien released. This is a new clause that Members likely have not seen yet. From what we have gathered, we're going to begin seeing these quite frequntly. So the Members should pay really close attention to the commitments when they come in and see where this requirement is called.
Melissa Jay Murphy 10:33
And you you mentioned the word "They will start seeing these frequently." I have heard anecdotally, I can't say I've done any kind of independent verification, but I have heard anecdotally that there are 1000s of these memorandum of agreement are recorded in the public records just in Florida, just in Florida. So it does seem as though this will be something that Members will see. So it's going to be a Schedule B-1 requirement. That they get a termination and release. So how do they go about getting that?
Brian Stringer 11:12
Well, as you can imagine, there's contact information for the broker in these memorandums of agreement. They they've made it quite straightforward to obtain and release the agreement. What they're going to do the the owner, the seller is going to have to contact the broker and confirm either confirm the amount for the release or negotiated release the payment in exchange for the release and termination. And because these things are so new, and we've not seen many of them satisfactions and releases we're going to underwriting review any proposed release termination. So if a Member does see this on the Schedule B-1, the owner wants to get through release termination, Members should send it to underwriting. So we can review the terms and make sure that it adequately releases the property not just the lien for the commission, but the covenant running with the land.
Melissa Jay Murphy 11:56
Yeah, I was gonna make that point. Our position is we not only want to terminate or release the lien, but we want to terminate the agreement so it's no longer a covenant running with the land.
Brian Stringer 12:12
Absolutely, because it's not clear from from my analysis, whether once you listed with the broker and paid a commission that you've satisfied the agreement from the plain terms of the agreement is going to continue for every subsequent sale.
Melissa Jay Murphy 12:23
Got it. So I may have missed this in your comments, but is there a contact information in the agreement so that the Member knows where to go to talk about getting this termination and release?
Brian Stringer 12:41
So that's a great question. In the memorandums of interest there we've seen do have a contact information for the broker, because they've actually made it quite easy to contact them and get the release and they tell you how they're going to give it to you. So these problems are not insurmountable title problems that we're going to see that are going to be completely derail a transaction. They are solvable. There's contact information in the Memorandum of Agreement and there's a mechanism for determining.
Melissa Jay Murphy 13:07
So, Brian, if you're going to sum this situation up for a Fund Member, what points would you make?
Brian Stringer 13:17
Well, I would reiterate one of our primary points that we always tell our Members and that's first of all, review your commitments very carefully to see what are your requirements, what are the exceptions, see if one of these things does in fact affect your property and if you have a commitment that was delivered prior to this webinar, or prior to The Fund, to the your general counsel blog. Look at your B-2s because sometimes these exceptions were showing up on the B-2s and some Members were looking at it very similar to the declaration of condominium or CCR is to just keep it on B-2 moving forward because the property is subject to so if you do have a commitment that was delivered some weeks ago, I advise that they look at the B-2 exception very carefully.
Melissa Jay Murphy 13:56
Very good point because we are undertaking to train our examiner's on what these agreements are and the requirement that they be treated such that there's a B-1 requirement, but just to be sure Members ought to also check the B-2 exceptions agreed. And if there's nothing there at all, do you have any advice for a Member?
Brian Stringer 14:23
I suggest that even there's nothing there, you know, ask your seller if you sign any sort of a listing agreement, do you have any outstanding agreements with respect to listing or selling your property? And if there is an agreement of record, talk this seller about what needs to be done just as an explained to them there is a mechanism to release them. There is a way to terminate the covenant running with the land and does this needs to be counseled with the seller and they can satisfy the requirement. If you do if the seller is going to satisfy be sure to get a proper release and termination, and we would advise the Member to obtain the release and termination record of themselves.
Melissa Jay Murphy 14:57
I would agree with that. Particularly if it's a B-1 requirement. And it's interesting that you make the comment that you should talk to the seller and explain to them what needs to be done. I agree with that 100%. Because if in fact the Member has been sent a transaction and there's no listing agreement or a broker involved, or a listing agent involved in the transaction, but you then see one of these agreements shown on your commitment, and it may very well be that the seller does not understand clearly or has ignored their obligation under this agreement to list with that particular broker. So it would be important for you to reach out to to the seller and ask them questions and explain to them that this agreement is there and we need to arrange for a release. Very good point. John Benson. Are there any questions in the chat so far?
John Benson 16:05
I just got unmuted by the master. No Melissa, there are no questions being asked at this point.
Melissa Jay Murphy 16:13
Perfect. Then we will wrap this up here by first thanking Brian for his time and energy and putting together all this information but I also want to offer some comments. These agreements are new, and to some people really a bit shocking. And I want to be clear that we are not expressing any opinion on their legality or their fairness or the business practices of any of the companies involved in this. The sole purpose of the webinar today is to make Fund Members aware that these agreements exist. Explain to them how they affect title and and how you can address the issue in connection with your particular closing. So Brian, and I hope that this has been useful information to you.
Melissa Jay Murphy 17:17
And this is a perfect example of what we're trying to do with these pop up webinars. Just sort of in and out quick information, new issues out there for you to deal with. So thank you so much for attending. And don't forget, we're gonna push this audio out to our podcast which is also called Title Now and keep an eye out for future podcasts that we are putting together because we're trying to sort of reinvigorate these things and offer them a bit more regularly. And as always, thank you for your support of The Fund. Thank you