Legal Quiz

Top Legal Hotline Questions of 2021

BY WILL MARTIN, GENERAL COUNSEL

It’s always challenging to create a list of the top questions we get on the Legal Hotline because we get so many questions on so many different topics. The nature of the questions we’ve gotten this past year has been greatly influenced by the existence of a global pandemic, which has notably resulted in a demand for housing that has far exceeded supply in many areas of the state. This has resulted in unprecedented competition for relatively few properties. Most of the questions on this year’s list reflect this state of affairs in one way or another. I have made an effort to select different questions than those that appeared in an article I wrote on my all-time top questions for the last issue of Insight. I have also made sure to include at least one question from each of the top categories of hotline questions we’ve handled this past year, which are, in order of frequency: (1) Offer to Purchase and Contract, (2) Disclosure, (3) Real Estate Commission Rules, (4) Landlord-Tenant/Property Management, and (5) Contract. I’ve also identified any relevant Q&A and where it can be found in the archived Q&As on the NC REALTORS® website.

QUESTION: Is it okay to use a non-standard addendum, for example, an appraisal addendum, with the Offer to Purchase and Contract? (Buyers have been coming up with all kinds of non-standard addenda in an attempt to make their offers stand out.)

ANSWER: The short answer is yes. Any non-standard addendum should be drafted by a North Carolina real estate attorney who has a good understanding of how the Offer to Purchase and Contract works. A broker who recommends the use of such an addendum should also have a working understanding of what the addendum says and how it will affect the rights of the parties to the contract, and should encourage their client to consult with a North Carolina real estate attorney if they have any questions. A listing agent receiving an offer with a non-standard addendum must deliver it to their seller client and discuss it with them, and should encourage their client to consult with a North Carolina real estate attorney if they have any questions.

Regarding the use of an appraisal addendum, if it is essentially nothing more than a promise by the buyer to purchase the property even if the appraisal is low, we believe such an addendum is of questionable value from a legal perspective. [Guidance for Agents Considering the Use of an Appraisal Addendum; Is an addendum necessary to make the contract “as-is” or obligate the buyer to purchase the property even if the appraisal is low? Category: Forms/ Addenda to Offer to Purchase and Contract]

QUESTION: What are the duties of a listing broker whose seller tells them that the seller has decided not to sell their property after it has gone under contract? (Not a new question, but we’re getting it more often. In this market, some sellers want to back out of contracts because they can’t find a place to move to, while others think they can get more money for their house by selling it to someone else.)

ANSWER: Assuming the property was put under contract using the Offer to Purchase and Contract, the seller doesn’t have a right to unilaterally terminate the contract absent a breach of contract by the buyer. The listing agent should advise the seller that if the seller refuses to perform the contract, the buyer would have the right to terminate the contract and seek recovery of all costs associated with the seller’s breach, including but not necessarily limited to the Earnest Money Deposit, Due Diligence Fee, and Due Diligence Costs. The seller should also be advised that the buyer may have the right to force the seller to perform the contact, known as “specific performance.” The listing agent should strongly encourage the seller to consult with an attorney, and should advise the seller that according to the Exclusive Right to Sell Listing Agreement, the listing agent’s firm would be entitled to its fee if the seller breaches the contract. In addition, if the listing agent concludes that it’s likely the seller will not perform the contract, it would be a material fact that the listing agent would at some point be required to disclose to the buyer agent or buyer. [Can a seller be required to perform a contract to sell real property? Category: Contract Law; Is Commission Due When Seller Gets Cold Feet? Category: Fees/Commissions]

QUESTION: May a broker represent two buyers who are interested in making offers on the same property? (Again, not a new question, but it’s coming up more often now; due to low inventory, many buyers are looking at the same properties.)

ANSWER: Yes, but very carefully and with an understanding that there is inherent risk in doing so. The broker should disclose to both buyers that the broker represents two buyers who are interested in the same property, and remind them that paragraph 5 of the Exclusive Buyer Agency Agreement (Form 201) specifically provides that the firm may represent other buyers interested in the same or similar properties, and that the buyer consented to such representation. The broker should assure them both that the broker will make every reasonable effort to represent them both in a balanced and fair manner, including providing them both with the same information about the property. Importantly, the broker should make it clear that under the circumstances, the broker will not be able to give either buyer specific advice on what terms to include in any offer they may choose to make. [Three Buyers, One House, and One REALTOR® Category: Agency]

QUESTION: Can a broker whose license is not on provisional status be paid a commission by someone other than a brokerin-charge? (This is an old question with a new answer)

ANSWER: No. In the past a “full” broker could receive a commission directly with the consent of his or her firm. However, that changed when Real Estate Commission Rule 58A.0120 went into effect this past July 1st. According to the Rule, a broker may only receive a commission or referral fee from their current BIC or, under certain circumstances, from a former BIC. [Can a broker affiliated with a firm receive a commission check directly from the closing attorney? May a broker be paid a commission by their former BIC? Category: Real Estate License Law/Rules]

QUESTION: Must a broker who is managing a rental property demand that the tenant surrender possession of the property before filing an eviction action against the tenant? (I’ve included this question for two reasons: (1)landlordtenant and property management questions make up one of the largest categories of questions we get on the hotline, and (ii) we have received reports recently of several summary ejectment cases that were dismissed because the property manager did not demand possession before filing the case.)

ANSWER: Yes. NC General Statutes §42-26(a) specifically states that a tenant who continues in possession of the leased premises without the permission of the landlord, “and after demand is made for its surrender,” may be removed from the premises in certain circumstances. Consistent with the statute, paragraph 17(b) of the Residential Rental Contract (Form 410-T) states that if the landlord terminates the lease or terminates the tenant’s right of possession under subparagraph 17(a), the landlord “shall be immediately entitled to possession of the Premises and the Tenant shall peacefully surrender possession of the Premises to Landlord immediately upon landlord’s demand.” Because of this requirement in the lease, and because of the language of NCGS §42-26(a), it is crucial for property managers to provide tenants with a written demand for possession before filing a summary ejectment action. [Must landlords demand possession before pursuing a summary ejectment action? Category: Landlord-Tenant/Property Management Issues]

QUESTION: Are escalation clauses legal? (This question has been around for a long time but is being asked much more frequently these days, no doubt due to the highly competitive market we have been in.)

ANSWER: Although their use is not encouraged, we believe it is likely that a contract containing a properly-drafted escalation clause would be found to be legally enforceable in North Carolina. A buyer who insists on including an escalation clause as a part of an offer should be advised to engage a North Carolina real estate attorney to prepare it. A listing agent must present the offer with the escalation clause to the seller and should recommend that the seller seek legal advice before accepting it. The listing agent should also advise the seller regarding any concerns the agent may have in sharing an offer from another buyer with the buyer who included the escalation clause in their offer because it might be considered “shopping” the other offer in violation of NC Real Estate Commission Rule 58A.0115. We believe a good argument can be made that the competing offer would be provided to confirm the final purchase price of the contract between the seller and the buyer whose winning offer contained the escalation clause rather than for the purpose of “shopping” the competing offer. However, if the listing agent is concerned about possibly violating the Commission’s Rule, the listing agent should make it clear to the seller that if they desire to accept the offer, the seller, rather than the listing agent, will need to provide the competing offer to the winning buyer. [Escalation Addenda and Sharing Competing Offers Category: Real Estate License Law/Rules Are escalation clauses legal? Category: Contract Law]

QUESTION: Must the Due Diligence Fee be refunded if the buyer terminates because of a low FHA or VA appraisal? (We’ve been getting this question ever since the “due diligence contract” rolled out more than 10 years ago, but its frequency has increased, almost certainly because of the size of due diligence fees that are frequently being paid now.)

ANSWER: In our view, no. The wording in the FHA and VA clauses in the FHA/VA Financing Addendum (Form 2A4- T) differs slightly, but both provide that the buyer will not “incur any penalty” as a result of a low appraisal. We do not believe the seller’s retention of the Due Diligence Fee should be viewed as a “penalty” to the buyer since the buyer received the benefit of having the right to investigate the property and the transaction during the Due Diligence Period and to terminate the Contract for any reason or no reason during that time. [Must the Due Diligence Fee be refunded if the buyer terminates because of a low FHA appraisal? Category: Forms/ Addenda to Offer to Purchase and Contract]

QUESTION: What are a seller’s remedies if the buyer refuses to deliver the Due Diligence Fee? (This question is not new, but its answer has been clarified by recent changes to the Offer to Purchase and Contract)

ANSWER: New wording has been added in paragraph 1(d) of Form 2-T to expressly state that if the buyer does not timely deliver the Due Diligence Fee after receiving written notice to do so, the seller has the right to terminate the contract upon written notice to Buyer, and that “Seller shall be entitled to recover the Due Diligence Fee together with all Earnest Money Deposit paid or to be paid in the future.” The new wording makes it absolutely clear that if the seller terminates the contract, they are entitled to recover the Due Diligence Fee and the Earnest Money Deposit. Paragraph 23(c) of the contract provides that the seller may also be entitled to recover reasonable attorney fees and court costs if legal proceedings are brought to collect the DDF and/or EMD. [What are Seller’s Remedies if Buyer Refuses to Deliver the Due Diligence Fee? Category: Forms/Offer to Purchase and Contract/Termination/Breach]

QUESTION: Assume a broker takes a listing as an “office exclusive” on the Exclusive Right to Sell Listing Agreement (Form 101), and that she is contacted by another broker whose buyer client is relocating to the area. The buyer broker describes the type of property the buyer is looking for and asks the listing broker if she knows of anything that’s available now or that may be available soon. If the listing fits the description of the type of property the buyer is looking for, can the listing broker tell the buyer broker about the listing? (I’ve included this question because we have received a significant number of questions about the “Clear Cooperation Policy,” which REALTOR® MLSs were required to implement the no later than May 1, 2020.)

ANSWER: If the listing broker gives the buyer broker information about the listing, it very well may constitute “public marketing” that would require the listing broker to submit the listing to her MLS within one business day for cooperation with other MLS participants. See the NOTE at the end of paragraph 10(b) of Form 101. Interpretation of the Clear Cooperation Policy may vary to some extent among MLSs, so a broker who has questions about the application of the Policy to a specific set of facts should contact their MLS. General information about the Clear Cooperation Policy is available on the NAR website at nar.realtor by searching under “Clear Cooperation Policy.”

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