Real Estate And Legal Considerations
( Originally Published 1924 )
Why is the employment of an attorney necessary for the real estate dealer? What points must be agreed on by both the buyer and the seller before a transaction can be considered complete? What point is most essential in considering the prorating of taxes, insurance, and water rates? When is insurance assigned and when is an endorsement made on the policy showing the interests of the purchaser? Name the parts of a deed. What is the origin of the expression "This indenture witnesseth"? What defects must be guarded against in connection with the parties to a deed P Explain the meaning and significance of the consideration in a deed. Show how the original surveys of the west-ern parts of the United States were conducted so as to locate the different parcels of land. What are the different warranties which may be contained in deeds? What is the significance of public records so far as titles are concerned? Explain what is meant by an "abstract of title." What is meant by an attorney's "opinion of title"? What advantages has title insurance? What is meant by a Torrens Certificate of Title Registration? Is the title purchased at a forced sale necessarily a good and clear title? What additional dangers are there in a title purchased at a legal sale? How does title to real estate pass upon the death of the owner? Name the various types of liens against titles to real estate. What are the covenants of a lease? What is implied in the relationship of landlord and tenant? How may it be dissolved or terminated? Why should the broker insist upon a written contract with his client? What must the broker actually accomplish in order to earn his commission? Show why the broker cannot legally or ethically represent both parties to a transaction without the knowledge of both. Why can he not act at the same time as both a broker and an operator?
REAL ESTATE transactions involve a number of legal considerations, some of which are simple enough, and others of which are extremely complicated. Consequently, one of the most important actions that the dealer ever takes is that of selecting a competent and trustworthy attorney. There is no other method which will assure protection to the dealer's clients, and even protection of his own interests. The legal technicalities involved in the transfer of a piece of property are too involved for the ordinary layman to understand, and many of the common occurrences in the real estate office, such as the making of a deed, are too serious to be trusted to any other than a mind which is trained in the law. About the ownership of real estate the law places every safeguard; it is almost a sacred act to come into, possession of such title. The very foundation of our social order is involved in the surety with which one may possess property, and no form of property is so enduring as real estate. Through fleeting generations, the land remains and the right to possess it and the income which it produces. The guardian of that right is the law ; very rightly that guardian is clothed in enduring and flawless garments. In order to be sure that every legal requirement in connection with a transaction is met, the dealer should be constantly guided by one who is able to speak with authority. The ability to dispense with such services would require years of careful study, in order to be sure of one's ground; and even so, the interests of all parties concerned might not then be adequately protected. Consequently this chapter makes no attempt to discuss legal principles involved in real estate transfers; it is intended only to survey some of the difficulties which are likely to beset the man who tries to deal in real estate without availing himself of the services of an attorney.
Considerations Affecting the Transfer of Real Estate. —One of the most important acts in dealing in real estate is the transfer of title or ownership. When a transfer is effected there are a great many considerations which must be kept in mind or one of the parties to the transfer is likely to suffer. Furthermore, a definite agreement must be reached on a number of items before the final transfer can be made or the closing papers drawn. A schedule of these items is found on p. 304. This schedule has been prepared by the General Counsel of the National Association of Real Estate Boards.
In the upper part of this statement is the name of the seller, the location of the property, and the name . of the purchaser. In the section following are listed the items upon which an agreement must be reached before the papers can be drawn. In the left-hand column are listed the items which the purchaser must pay, such as purchase price, interest, rents, taxes, etc. In the right hand column are listed the items for payment of which the purchaser receives credit. Obviously the two columns must balance before the agreement is complete. In the next section is a list of all papers to be secured in closing the real estate deal. The purpose of such a schedule is to enable the salesman in consummating a transaction to be sure that all items are covered and to guarantee that there will be no termination of negotiations on account of items which have been overlooked.
In making a closing statement, the salesman should particularly regard certain points which are set forth in this schedule. The first of these is interest. It is not sufficient to say that interest will be prorated but the definite basis upon which interest is to be divided should be set down, naming the date from which interest is to be paid to the seller and from which it is to be secured through the purchaser. When earnest money is deposited at a considerable length of time before the final papers are prepared, it is customary for the seller to pay interest on the money so deposited.
The interest on rents, taxes, and water rates is also prorated. Difficulties frequently arise because the papers of a transaction have been made to read that these items were to be prorated without mentioning the date from which they were so prorated. Naturally it makes a considerable difference whether taxes, for example, are prorated for the calendar year or for the tax year. The closing statement should make this item perfectly clear.
Equal care should be taken in regard to the insurance papers. It must be clear which of the parties to the transaction is to pay the insurance, and if it is to be prorated, dates should be definitely stated. In some trans-actions the insurance is assigned to the purchaser. This would be true in general of cash transactions or others in which the original consideration paid is sufficient to cover a large part of the purchase price. In installment purchases, however, the insurance is not assigned to the purchaser upon the closing of the deal but a rider is attached to the insurance policy, setting forth the interest of the purchaser in the property insured. This is an important item in real estate transactions and should be carefully guarded in the preparation of the closing statement so that there can be no ambiguity or indefiniteness in the arrangement.
The other items indicated in the first part of the closing statement should be regarded with equal care in the preparation of the statement with the amount which each party must pay indicated in the proper column of the paper. Otherwise misunderstandings are likely to arise and the transaction may even be completely abandoned because of lack of definiteness in the original agreement.
Papers to be Secured in Closing a Real Estate Deal. All the items indicated in the second section of the schedule of closing statement should be secured and checked by the attorney of each party to the transaction. There are three considerations which must be remembered in connection with the papers ; (1) the deed itself will be discussed; (2) the nature of the warranty contained in the deed; and (3) the evidence of title.
Although deeds vary from state to state and are fixed in part by the laws of the different states they agree in general in having nine separate parts. These parts are (I) the date and opening sentence ; (2) the parties; (3) the consideration ; (4) the granting clause ; (5) the description of the property; (6) the habendum clause; (7) testimony; (8) witnesses, and (9) acknowledgment.
The first clause, beginning "This indenture" and containing the date, is not essential to the lawfulness of the deed, but is a survival of an interesting ancient custom. It was customary in ancient times for such important papers to be executed in duplicate, as it is now, so that each party to the contract should have a copy of it. The two copies were placed together and the top of both notched and otherwise cut in an identical zigzag manner. The two copies being mutilated thus in the same manner matched, and it could literally be said that "this indenture witnesseth." The custom of notching such papers has long since been discarded, but the phrase still remains. Unless the deed is dated, the date is presumed by law to be that of delivery to the purchaser.
There are two points to be watched in connection with the parties to the deed, which are commonly known as the "grantor" and the "grantee" although the deed itself calls them party of the first part and party of the second part. The first point that should be determined is the competency of the parties to enter into the con-tract. Defects in title not infrequently arise because deeds have been executed by parties not competent. It should be remembered that minors, mentally deficients, aliens, and those who act under duress are usually not competent and the deed drawn by any of these parties may be set aside by court action. Furthermore when one of the parties signing the paper is acting as an agent for the owner, the agency should be expressed in writing. An agent in order legally to give a deed to the property of his employer must possess power of attorney or written statement duly executed by the owner setting forth the powers of agent. Executors of estates and trustees must always be clothed with the necessary authority to convey real estate and officers of corporations must show that they have legal authority to act. This point should be left with the attorney who ex-amines the status of the one who signs the deed. Naturally in order to convey real estate, the one who gives the deed must possess the property which he promises to convey. The law usually protects the purchaser in this connection, for it makes it a criminal offense to sell that which is not owned, but careful guarding of this point will avoid trouble.
A consideration is necessary in order to make the contract or deed binding. A contract of any sort may be set aside if there is no consideration; that is, if there is nothing of value to bind the contract. A mere promise, therefore, to give away something will not stand in a court of equity; but if, acting on that promise, the recipient of the gift parts with some valuable consideration, the promise is valid. A consideration may be "good" or "valuable"; love and affection may be a "good" consideration, but a "valuable" consideration is one that possesses actual money value. The valuable consideration is the one that is most binding in a deed. The consideration named in the deed in most states, however, need not be the actual amount received for the property; it may be a fictitious sum, such as "one dollar" or "ten dollars" ; but it should in every case be mentioned as a valuable consideration.
The "granting clause" agrees to "grant, bargain, sell, remise, release, convey, alien and confirm" or in words to that effect transfers ownership in the subject of the deed.
The description of the property is very important; many difficulties and many disappointments arise in the transfer of real estate from inaccurate or inadequate description of property which the deed is designed to transfer. For example, a man purchased a lot in the city some years ago, built a house on it, and lived there for years. When some difficulty was made at a later time, and he had the title examined by a competent attorney, it was found that the deed which he held covered an entirely different property from the one upon which he was residing. Such cases could be multiplied with-out number, but this is sufficient to show the importance of accurate and complete description of property.
It is interesting to know in this connection the means used to locate property in the United States. Ordinarily location is determined with reference to the land and ,the natural features on it. How is one to locate the land itself ? The methods used in the original surveys of the United States are different in different parts of the country but in later surveys covering the western part of the country the land was charted as follows:
For each survey the line was drawn from north to south, beginning at some well-established point, such as the mouth of a river. This line was called the "Principal Meridian" for that survey. Other lines were drawn east and were known as "base" lines. Parallel to the Principal Meridian lines were surveyed at distances of six miles.' The long strip of land between each of these meridians is called a "range." Each range in turn is divided into a number of sections called "townships" by running a line parallel to the base line at each interval of six miles. Beginning with the south-ern, these townships are numbered in order, "Township 1," "Township 2," etc. Thus the whole territory was covered and blocked off and numbered.
In order to locate the township, it is merely necessary to tell in what range it lies and its number, such as Town 5, Range 4, East of the Third Principal Meridian, the fifth township north of the base line, in the fourth range of townships east of the Third Principal Meridian, which happens to lie in Illinois. The town-ships, in their turn, are divided into sections, each one mile square, containing six hundred and forty acres. These sections are numbered from one to thirty-six, so that the section may be located in the township by number. The sections are sometimes kept as a unit, but more frequently in the East and central parts of the United States they are divided into halves, quarters, etc. The ordinary description, then, of a piece of land must give the exact portion of the section, such as the "Southeast, one-quarter, of the West one-half." As the plats become smaller and smaller, the fractions at the beginning are increased so as to indicate the proper amount of land.'
In describing city lots, it is common practice to refer to them as lots of such and such numbers in the plat which has been prepared by the subdivider and filed in the proper place. This prevents the detail that would have to go into a document describing the location of a lot.
It is advisable to have a survey made to determine definitely the limits of the property actually transferred by the deed. Errors of a few feet are not infrequently made in the papers that transfer title and sometimes an error of a few feet makes a great difference in the value of a piece of property. The custom of describing property as so many acres "more or less" may be responsible for some of the inaccuracies that sometimes occur in deeds. A survey will always determine the exact limits and avoid regrets and mistakes.
The other parts of the deed are clear from a reading of the sample deed shown on page 303. Some of these, such as the "testimony" clause, are merely formal records and much influenced by ancient customs. In some states witnesses are required and it is always safe to have a deed witnessed. Acknowledgment is necessary before a notary public or one authorized to administer oath.
The Nature of the Warranty Contained in a Deed—The warranties contained in a deed are four kinds: (1) general warranty, (2) special warranty, (3) trustee's and executor's warranty, (4) quitclaim deed. The general warranty is the one which has been described and which is most commonly used for the transfer of property. It transfers title and warrants to defend the purchaser against all who may assert a claim to the title. This does not mean that the seller guarantees to defend any claim which may be made against title but rather that he agrees to pay any damages which may be caused to the purchaser from the establishment of a legal claim by anyone else.
A special warranty guarantees to defend the title against particular persons mentioned in the deed only and not against all who may assert claim to it. This is obviously not so comprehensive a warranty as that contained in the general warranty deed.
A trustee's and executor's warranty is a form of special deed which transfers only the interest in the property which the officer giving the deed is legally qualified to transfer. All such deeds must be very carefully drawn so as to comply accurately with the provisions of the law covering trusteeship, etc. The necessity for an attorney's service is nowhere greater than when such a deed is involved in the transfer of real estate.
A quitclaim deed does not contain a guarantee of title, but simply transfers such rights as the grantor possesses in the property transferred. A common occasion for the use of a quitclaim deed is when a widow disposes of her dower rights in the real estate of her husband.
Evidences of Title. The fundamental concept of property is a right, but in order to avail himself of the right at all times one must possess evidence of it. Such evidence is commonly referred to as a title. Hence one of the most important aspects of real estate ownership is title. In order to be a desirable title the evidence of the right must be indisputable. Such a title is called a clear or merchantable title. A clear title is one which can be traced back to the original grant of the land from the state to the private owner. If at any point this record of the title can be questioned, it is not a clear title.
In order to enable titles to be traced from the original grant it has been necessary for a system of public records of real estate transactions to be kept. To be forever valid a real estate transaction must be recorded where these public records are kept and a clear title can be traced through these public records from the original grant of land to the present owner. The records are maintained at public expense and unless a deed is re-corded title may be disputed. Title passes, however, when the deed is actually passed from the seller to the buyer and not when the deed is recorded. The recording of a deed does not constitute a sale, but it is a means of making permanent the record of such a transaction, so that in all time to come, though the deed may be destroyed, the property is subject to the provisions of the transaction.
The method by which a title is traced is known as an abstract of title. A competent authority searches the records regarding the transfer in question and traces its history from the earliest record available. He makes a transcript of that record, showing all the transactions that have affected the title to the property and how they were carried out. This abstract shows the transfers of the property by deed, mortgages placed against the property, and the disposition which has been made of them, and any other factor that might affect the presumed owner's rights in the property. Such a search is known as a search of title and the transcript is known as an abstract of title. In order to be a complete search of title, the records of the Registrar's Office, the United States Court of Bankruptcy, and the offices where the records of taxes and assessments are kept must all be searched. In other words, every possible source from which the title may be affected must be examined.
In order to be sure of his title, the purchaser of real estate should have the abstract of title examined by a competent attorney. The transactions indicated by such an abstract frequently indicates to the attorney points that must be investigated in order to insure that the title is clear. The ordinary purchaser, untrained in law, cannot hope to pass judgment on an abstract of title, and he is likely to come to grief if he tries to dispense with the services of an attorney. The attorney who examines the title expresses his opinion that it is clear or not clear in what is known as an opinion of title.
However conscientious and competent the search of title may be, defects may be found or may arise at a later date to prejudice the interests of the owner of the title. Such losses can only be covered by title insurance. Upon the payment of a premium, the purchaser of real estate, or the owner of a first mortgage, may secure a i insurance policy guaranteeing him against loss from undiscovered defects in title. The premium is based upon the value of the property insured and is in proportion to it. Large organizations known as title insurance companies have come into existence for this purpose Since their assets are large, the value of their policy cannot be questioned.
Such companies in issuing a policy make their own search of title. In making their search they do not depend solely upon the records available in public offices, but they have their representatives in the courts and in other public offices to keep them informed of transactions affecting the title of real estate in the territory in which they operate.
Some title insurance companies, as well as some mortgage companies, guarantee the payment of the mortgages which they sell. In such cases the mortgagee appoints the company his exclusive agent and agrees to permit it to use his name in legal proceedings. The charge for such a policy is usually one-half of one per cent of all collections. The service rendered is that of freeing the mortgage holder from all details of collection and worry about his holdings. He merely relinquishes one-half of one per cent return on his investments and receives for it almost perfect safety and complete relief from worry.
The title insurance policy is always issued subject to certain exceptions mentioned in Schedule B. Sometimes these exceptions are very important but look innocent enough to the inexperienced. When a title insurance policy contains exceptions, therefore, the opinion of an attorney should be sought regarding those exceptions. Provision should also be made for any transactions that may have occurred during the time intervening between the date of the policy and the final consummation of the purchase. Sometimes taxes may fall due and other circumstances may arise which affect seriously the value of the title.
The use of title insurance companies is increasing, and these companies are increasing the scope of their activities. Formerly they confined themselves to local territories, but now they are rapidly becoming nation-wide. With the insurance companies and other investors going more and more into a national market, this nation-wide insurance service is increasingly useful. The title insurance policy increases the salability of real estate and real estate loans. Without it a large amount of precaution cannot prevent occasional losses with result-ant timidity of investors and narrowing of the market.
It should be pointed out that the greatest need for title insurance is in large cities where the title to real estate is more frequently affected by loans and other transactions. In smaller places it is not so difficult to ascertain what transactions have taken place that affect the title of real estate as it is in the city. The activities of the title insurance companies, therefore, are not so important in the smaller places as in the cities and probably never will be.
The Torrens System of Land Registration. Another method of assuring the title in land is known as the "Torrens System of Land Registration." Under this plan the state examines the title, certifies it, and when no fault is found, issues title that is final and indefeasible by court order to the person claiming it. This is really a system of state title insurance.
The procedure is in general as follows : The owner of real estate petitions the court in whose jurisdiction the property lies, for registration of his title and the issuance of a certificate of registration. An official examiner is appointed to examine the title. Notice is given that such petition has been filed. A hearing in court is held of all objections and of all interests of others in the land, that would prevent it from being registered in the name of the petitioner. Unless valid objections and restrictions are brought forth, the petition is granted; the court orders the title registered; the certificate is granted, and forever thereafter the owner possesses such title as is set forth in the certificate subject, of course, to subsequent liens which he may put upon it. All costs of such registration are borne by the person who asks for it, and land once registered is, as a general rule, obliged to be kept registered thereafter. When any injury is wrought upon innocent persons who had interests in the property before it was registered, the state is obliged to reimburse them for such loss.
The chief advantage urged for the Torrens System is that it makes real estate transactions easier because of the clear and indisputable title which it produces. Real estate, as a result, becomes a more easily-marketed commodity, a more liquid asset. It also prevents the duplication of effort involved in repeated searches of the same title ; the title is searched once for all and certified by the state. A number of objections, however, have been urged against this system. It is said that in cases where innocent owners did not know of the proposed registration, the system deprives them of their property without due process of law; that it is inflexible and fraught with possibility of fraud; and that it is really a hindrance against liquidity of the asset, since it ties up the land forever in the system.' On the whole it has not been very successful in this country, although it has been elsewhere; for example, in New Zealand. Some have maintained that its lack of success has been due to the absence of compulsory registration and that if that feature were always present, its success would be assured.
Purchase at Forced Sale. Real estate is purchased at forced sale in cases of foreclosure of mortgages, at public sale for taxes or for liens. While transactions of this sort are infrequent compared with regular sale and purchase, they are by no means uncommon, especially in cities. It is the common conception that the title obtained from a court officer in such a forced sale is clear and unassailable. This conception, however, is erroneous. A title given at a sale under court order is only such as is possessed by the owner against whom the proceedings are directed. If his title was good, then the title given by the court is good; if it was not clear title, the title given is not clear. In fact, purchase at forced sale involves additional dangers to title, for if there has been any error in the proceedings, the entire sale may be set aside. If the strictest provisions of the law have not been complied with in every respect the purchaser of the title at the forced sale may find himself dispossessed. Extra precaution is therefore necessary in making such purchases. An extra diligence is desirable in the search of title.
The Inheritance of Real Estate. Upon the death of an owner of real estate, title passes automatically to his heirs, unless it is otherwise disposed of by his will, providing it is not necessary to sell the real estate in order to pay the debts of the deceased. The heirs, however, may not all be known and the purpose of probating an estate is to determine who the heirs are and to assure payment of all debts. When the land is purchased from the heirs of the deceased owner, it is customary for the heirs to state in the warranty deed that they are sole heirs of the estate. Commonly the heirs join in one deed, but it is not necessary. A separate deed may be obtained from each heir. The danger of missing some of the heirs is obvious and must be carefully guarded when property is bought from the heirs of an estate. Another point which must not be omitted is that of securing a quitclaim deed from the widow in case she has dower rights to the property. It should also be remembered that minors cannot sign a legal deed and an administrator cannot alienate the title to real estate from a minor heir. In case such an heir gives a deed before he is of legal age, he may disown his act upon coming of age and recover possession of the property.
Liens Against Titles. A lien against real estate or other property is a claim against it which is enforceable at law by appropriation of the property, if necessary. Four types of liens are common against real estate and should be guarded against : (I) mechanics' liens, (2) mortgages, (3) taxes and assessments, and (4) other liens arising from court actions.
Mechanics liens enable laborers and those who have furnished materials for the improvement of real estate to secure their pay. By filing a claim with the county clerk, setting forth the details of the services or material furnished, laborers and contractors are able to secure either payment of the claim or foreclosure and sale by an officer of the court. In the settlement effected after the sale, the proceeds are used to pay the costs of such a procedure first, and then to satisfy as far as possible all claims against the property. In the settlement, precedence is given to the mechanics' liens over all other interests which are not recorded at the time of the filing of the claim. Thus a mortgage, although it were dated earlier than the filing of the claim, unless recorded, would be in a secondary place. If there be more than one mechanics' lien, speaking very generally, all are settled in the order in which they were filed.
Security against mechanics' liens can be obtained only by search of the records in the office of the county clerk or by obtaining from the contractors and subcontractors who have done the work, an affidavit that their claims have been paid. Such a sworn statement would void any lien that might be placed against the property.
Mortgages and taxes and assessments have been discussed in other chapters. When mortgages have been given and recorded against real estate, they form a lien on the title until such time as they have been discharged. The actual payment of the mortgage satisfies it, but proof of its payment should be made permanent and permanently available by having satisfaction recorded. Taxes and special assessments become a lien on real estate when they fall due ; their payment discharges the lien.
Other actions at court which affect title to real estate are judgments and decrees, and the settlement of estates. The records of both the County and District Courts must be searched in order to discover all those decrees and be informed of the actions which may affect the title.
Legal Considerations in Renting. The chief instrument used in renting is the lease. A lease may be either oral or written, although most states require that leases for a longer length of time than three years be in writing. Such written leases may be recorded in the same manner as a deed, but it is not common to have any other than the long term leases so recorded. Obviously the interests at stake in the long term leases and the possibility of destruction of the lease itself and of for-getting its provisions are so much greater in the case of the long term lease that it is wise to have it recorded. The relationship established by the deliverance and acceptance of a lease either written or oral is that of land-lord and tenant. As indicated in the chapter on leasing and property management, this relation is important in certain cases in which the owner may desire to secure possession of his property.
The Covenants of a Lease. There are two kinds of covenants, or agreements, contained in a lease; covenants expressed and implied. A lease may contain any number or kind of expressed covenants upon which the parties to the lease can agree. Some of the matters commonly covered are the term or length of time which the lease shall run, the amount of rent to be paid, provisions concerning amount of repairs and when they are to be made, the liability for payment of taxes, the uses to which the premises leased may and may not be put, and the obligations and responsibility of both parties in case of fire. Any condition which either party may wish to embody in the lease becomes, if agreed upon and inserted, an expressed covenant.
Implied covenants are those agreements which are naturally to be inferred from the making of the lease, even though they are not expressed in the lease itself. Such a covenant is that of quiet enjoyment, by which the landlord is obliged to give his tenant protection from intruders who make superior claims to the possession of the property. It does not mean protection from the casual trespasser, but such quiet enjoyment as is war-ranted to the owner in the warranty deed. On the other hand, there is an implied covenant against waste on the part of the tenant. He is expected to take usual good care of the property whether it is so expressed in the lease itself or not. It is to be noted that the implied covenants may become the subject of expressed covenants by their being included in the terms of the lease.
Termination of the Relationship of Landlord and Tenant. The relationship of landlord and tenant may be terminated in four ways; by the expiration of the term of the lease, by notice of termination or cancellation, by surrender of the lease by the tenant with the permission of the landlord, or by eviction. Upon the termination of the lease, it is necessary for the landlord to enter the premises and take possession in order for the tenancy to end. Otherwise it becomes a tenancy at will or from year to year. It is not necessary, how-ever, for him to give notice that he will enter.; the expiration of the lease is sufficient notice.
In case the lease contains a clause which provides for the automatic extension of the term when the lease expires, it is necessary for the landlord, if he desires to take possession of his property, to serve notice on the tenant of the cancellation of his lease. Care must be taken in serving such notice that it be served to the person himself or posted on the property in a prominent place, in case the person himself cannot be found. Failure properly to serve notice of the expiration of lease causes it to continue in force. Such notice should be given one rent pay day before possession is actually desired.
Termination by surrender of the lease is legally accomplished by the signing of an agreement to surrender just as the tenancy is established by the signing of a lease. The tenant cannot avoid the responsibility for rent by merely giving notice of his intention to surrender his lease; the surrender must be accepted by the landlord.
Eviction is of two kinds, actual and constructive. Actual eviction occurs when the tenant is actually dispossessed of the property by the assertion of a prior right by a third party or by dispossess proceedings by the landlord for failure to comply with some provision of his lease, such as the payment of rent. The process of dispossess has been described above. Actual eviction for any other reason is rare. Constructive eviction is less common. It occurs when the landlord by reason of his failure to perform the covenants he has agreed to perform, makes it impossible for the tenant to use the premises for the purpose for which they were rented. In order to secure relief from the obligations of the lease the tenant in case of constructive eviction must actually remove from the premises; his presence upon them is evidence that disproves the constructive eviction. He may, however, remove from only a part of the premises and secure partial relief, in proportion to the inconvenience he has suffered. A case of constructive eviction would arise if the landlord failed to keep the hall-ways and stairways of an apartment building in such condition as to enable safe and reasonable passage. It is sometimes very difficult to determine whether there is a case of constructive eviction, and a tenant should be cautious and act only after advice is obtained from the attorney if there is likelihood of a suit at law to force him to pay the rent.
Legal Considerations Affecting the Broker. A real estate broker has been defined as "one who negotiates transactions in real estate for others, receiving compensation for his services usually in the form of commissions." 1 It is evident from this definition that the relationship between the broker and his principal is one of agency and employment. A thorough knowledge of the relationships of the two would include a study of the complete law of agency a very complete and comprehensive branch of civil law. But some general principles may be here pointed out.
The first point to be noticed is that the broker is definitely employed by his principal. In numerous legal decisions the necessity for evidence of employment, either expressed or implied, has been emphasized; while in some states, in order for the broker to secure his commission, the employment must be in writing. It is certain that the broker will avoid many difficulties if he will make it a rule never to make any effort to sell property for which he does not have a definite contract of agency. This is altogether right, for otherwise the owner of a property might constantly expose himself to liability for commission if he did no more than merely quote a price on his property.
A large number of real estate dealers are going further than demanding a contract of agency and are insisting upon the exclusive contract. There are many things to be said in favor of the exclusive contract; the one with which we are most interested here is that it simplifies the relationship and avoids many difficulties. A copy of an exclusive agency contract is reproduced in the appendix. It should be pointed out here, however, that the provision in the exclusive contract by which the parties agree to give notice before terminating it does not bind the owner to payment of commission. For there is no consideration that binds the promise to give notice other than the commission promised. The owner can be held for damages for breach of contract, but not for commission.
The services which the broker is expected to render in order to secure his commission consist of procuring a purchaser of the property who is "ready, willing, and able to buy" upon the terms agreeable to the seller. He must actually cause a "meeting of minds." The mere verbal agreement to sell or purchase vaguely expressed is not sufficient; the details must be worked out so as to show that the minds have actually reached an agreement. After securing an agreement, however, the broker has earned his commission, regardless of whether the sale is actually consummated. In case a preliminary sales agreement was signed, for example, in which the owner agreed to furnish a merchantable title, and such title could not be obtained, the broker would nevertheless be entitled to his commission. The broker would make a big mistake, however, to feel that when the contract to purchase had been signed he can step aside and ignore the rest of the operation. It is in the negotiations that come in this period that the skill and service of the broker are most severely tested, and upon his handling the case well will depend largely his reputation for service and his success. Legally he is not obliged to bother with this stage of the process; but the man who seeks to build up his business does not limit his services to the legally necessary acts. He is judged by what he does that he is not obliged to do.
Broker Must Act in Good Faith. As the agent of the owner, the broker is obligated to act in good faith in the interest of the owner; he is employed to protect and forward the owner's interest. If the prospective purchaser wants the property for a special reason, the broker should reveal that to his client. He is not obliged to betray any confidences in order to protect the interests of his employer, but he should be sure that the owner is warned so that he will act in his own interest. If there is an undisclosed third person who is negotiating for the property, the agent is not obliged, even if he knows the identity of the third person, to reveal it, but he is obliged to tell the owner that there is an undisclosed third person. In every way in which he would protect his own interest, he must protect that of his employer. It is important that this point should be kept clearly in mind. The broker is dealing with two people whose interests are opposed, and his interests lie in getting the two together in some sort of compromise. In effecting this compromise, he should keep clearly in mind the person who has employed him.
By the same token, the broker cannot act for both parties to a transaction and receive commission from both unless both are fully aware of his status. The interests of the two are opposed; but when he is employed by either he is expected to protect that one's interest. Obviously he cannot protect two interests which are diametrically opposed, and for him to conceal from the principals that he is acting in the double capacity is to deceive them. In case both parties are fully informed of his status, there is no legal objection to his receiving the double commission.
Distinction Between Broker and Operator. These considerations indicate how important it is to keep clearly in mind the distinction between a real estate broker and a real estate operator. An operator has been defined as "one who buys and sells real estate for his own account, for the profits to be made from such transactions. He may be known as a subdivider, a developer, a builder, a trader, or a speculator." It has probably been common for the real estate broker to act in the capacity of operator in a great many cases in order to supplement his efforts as a broker. Seeing an offer which he thought a bargain, he has purchased on his own account and held for an increase in the value, collecting at the same time a commission from the owner for the sale of the property. In many states where license laws are in effect, this practice is altogether outlawed, and licenses are revoked when it is practised. In case a broker wants to purchase a property which is listed with him as a broker, he must make it clear to the owner that he is purchasing on his own account, not for a third party. The two capacities of broker and operator are not inconsistent; the fraud comes in not making it clear in what capacity the broker is acting in negotiating the sale. The operator is not employed by the owner, but acts upon his own initiative and for his own profit to be derived from future increases in the value of the property in which he deals. The broker takes no title and consequently no risk in dealing with his employer ; he merely sells for commission. The operator, being a principal in the con-tract, cannot act as an agent. Clear-cut, straightforward dealing will in every case obviate the difficulties which might arise from any concealment. The advantage of such honest dealing to the business as a whole in building up the confidence the public has in it will be evident at a glance.
1. The legal aspects of real estate transactions are complicated and of a highly technical nature ; therefore it is important that the broker or real estate dealer employ the services of a competent and trustworthy attorney.
2. In closing a real estate contract to purchase or exchange, the dealer should have before him a sheet which would serve to check all the points which he should guard and have an agreement upon before he thinks that he has made a sale.
3. In making such an agreement as that taxes and water rates are to be prorated, care should be exercised to define exactly the date from which such a prorating is to be made.
4. The deed is the most important document in real estate transactions. It serves to pass the title to real estate when it is passed from seller to purchaser. The parts of a deed are (1) the date and opening sentence; (2) the parties to the deed ; (3) the consideration; (4) the granting clause ; (5) the description of the property ; (6) the habendum clause ; (7) testimony; (8) witnesses, and (9) the acknowledgment.
5. A survey may be necessary to fix exactly the limits of property described in a deed. Such a survey will frequently prevent disappointment over the purchase of property which is improperly described.
6. The nature of the warranty contained in a deed depends upon the guarantee which is made in it. There are three kinds of warranties : (I) the general warranty ; (2) the special warranty ; (3) the trustee's and executor's warranty, and (4) the quitclaim deed.
7. Title in order to be satisfactory must be clear ; the ways in which title is assured are by abstract of title, title insurance, and Torrens registration of title. The last form is the only one which is an absolute guarantee of title ; the others are means of becoming fairly certain regarding the title, or of collecting damages in case defects of title subsequently arise.
8. Purchase at a forced sale secures such title as the person proceeded against possessed. Such title may be good, bad, or indifferent.
9. Liens against titles are of four kinds : (1) mechanics' liens; (2) mortgages; (3) taxes and assessments; (4) other liens arising from court actions such as decrees in bankruptcy, divorce decrees and such.
10. The lease is the instrument which transfers the right to use property. The terms and conditions agreed upon constitute the covenants. Covenants may be implied as well as expressed.
11. The relationship of landlord and tenant which is established by the lease may be terminated (I) by the expiration of the lease ; (2) by notice of termination or cancellation ; (3) by surrender of the lease by the tenant ; (4) by eviction, either actual or constructive.
12. The broker in order to collect his commission must be definitely employed, and he must furnish a purchaser ready, willing, and able to buy upon the terms established in his contract with the owner.
13. The broker must act in good faith with his client or employer ; he cannot represent both parties to a sale without the knowledge and consent of both and he cannot with discretion act as purchaser or operator at the same time that he is acting as broker.